The phrases "pre-qualified" and "pre-approved" are frequently thrown around when discussing mortgages for property buyers. Although it might be tempting to use these terms interchangeably, they each denote different steps in the mortgage application procedure. It's critical that property buyers understand these differences.
Pre-qualification represents the first step wherein borrowers gain a rough idea of the size of the mortgage loan they can anticipate to qualify for. The second step is pre-approval, which is essentially a conditional commitment from the lender to provide the mortgage.
"Pre-qualification is reliant on the data provided by the consumer," explains Todd Kaderabek, a residential broker associate with Beverly-Hanks Realtors based in Asheville, NC. "On the other hand, pre-approval involves verification of consumer data, such as credit checks."
Pre-qualification is a process where a prospective borrower provides an overall financial snapshot, including income, debt, and assets, to a lender or bank. Based on this information, the lender gives an estimate of the loan amount the borrower might receive. This step can typically be completed over the phone or online, and there's usually no associated cost.
Pre-qualification is rather swift, often taking only one to three days to receive a pre-qualification letter. Importantly though, pre-qualification does not involve an in-depth analysis of credit reports or a detailed examination of the borrower's capability to purchase a house.
"It's virtually necessary to have a pre-qualification letter with an offer in our market," says Kaderabek. "Potential buyers are often asked if they have met with a lender and understood their pre-qualification status."
Moving onto the second step, pre-approval is a more thorough process. As Kaderabek points out, "While pre-qualification can be a decent indicator of creditworthiness and borrowing potential, pre-approval is the more definitive word."
Pre-approval requires completing an official mortgage application and providing the lender with necessary documentation for them to carry out an extensive credit and financial background check. The lender will then offer pre-approval up to a specific amount. This process provides borrowers with a better gauge of the applicable interest rate. Some lenders may allow borrowers to lock in an interest rate or charge an application fee for pre-approval, which may be several hundred dollars.
Going through both stages-pre-qualification and pre-approval-before hunting for a house offers a clear picture of the spending range, preventing time wastage on overpriced properties, and quickening the buying process by letting sellers know the offer is serious.
Concluding the process is the loan commitment, only issued by the bank once the borrower and the chosen property-appraised at or above the sales price-have been approved.
Going through pre-qualification and pre-approval gives potential homeowners a good estimate of the price range they can afford. However, sellers are more likely to negotiate with pre-approved buyers, allowing them to close on a home more quickly-an attractive prospect in a competitive market.
Understanding the distinct differences between pre-qualification and pre-approval can significantly ease the mortgage process for would-be homeowners.