Pre-Qualification Versus Pre-Approval In Home Loans

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Pre-Qualification Versus Pre-Approval

Gustan Cho Associates

Pre-Qualification Versus Pre-Approval In Home Loans

This BLOG On Pre-Qualification Versus Pre-Approval In Home Loans Was UPDATED On December 27th, 2018

The terms pre-qualification and pre-approval are often used interchangeably, sometimes harmlessly other times not so harmlessly.

  • Unfortunately, many buyers will be misled without adequate preparation due to the belief that if they have been pre-approved by a lender for a mortgage when in fact they have only been pre-qualified
  • When you drill down on it, there is a fair amount of disparity between these two terms
  • We’ll let you know how different they are and why misunderstandings can be problematic for borrowers

Difference On Pre-Qualification Versus Pre-Approval In Home Loans

Getting mortgage Pre-qualified is generally the first step in the mortgage loan process and is usually fairly simple.

  • Give your bank or lender a complete financial image, including debts, assets and income
  • After assessing this data, the lender can give you a hint of the amount of the loan you are eligible to
  • The pre-qualification can be completed by telephone or online and, and usually, free of charge
  • A prequalification loan often does not take account a close scrutiny of the credit report or a detailed analysis of the liquid assets needed to close or often times income qualification (including adequate scrutiny of tax returns)

In the first phase of pre-qualification, you can talk over with your lender any goal or requirement related to your mortgage. At pre-qualification point, the lender can explain different mortgage options and mention the type that suits your situation.

Importance Of Pre-Qualification Versus Pre-Approval

Since this process is fast and depends only on the data provided to the lender, a pre-qualification lender from your loan officer is often times not enough to enter into a contract, unless borrower has impeccable credit, income (preferably W-2), and plenty of liquid assets.

  • Self-Employed borrowers require a thorough examination of tax returns, unless they are doing a bank statement only loan, but that is a subject for another blog

Pre-Qualification Versus Pre-Approval: The Pre-Approval Process

Getting pre-approved is generally the next step, and is usually more difficult and time consuming.

  • You can complete fully a mortgage application and provide the lender with the necessary documentation to conduct a thorough review of your financial history, credit profile, income, and assets (generally liquid)
  • As a general rule, when you have not yet found a home, any reference to the “property” on the application remains empty of “TBD”
  • From there, the lender can tell you the specific value of the approved loan and also you can get an estimate about the interest rate on that loan and in some cases you will be able to lock in a certain interest rate

Upon pre-approval, you will receive a conditional preapproval usually signed by an actual underwriter (as opposed to just the loan officer as in a pre-qualification).

  • Obviously, this gives you an advantage when it comes to a dealing with a potential seller and the seller’s realtor because they will know that you will almost certainly be issued a mortgage

You will know in advance how much you can afford by completing these two processes (pre-qualification and pre-approval) even before you start looking for a home.

  • So, you do not waste time guessing or looking for real estate that exceeds your capabilities
  • Getting pre-approved for mortgage loan will also help you act rapidly when you find the dream home
  • When an offer is made, it will not be affected by the receipt of funds, which will save valued time
  • In competitive real-estate market, this allows the seller to know that you are a serious buyer and this may avoid you from losing your perfect home to alternative buyer who has already made it through the pre-approval process

Similarities Pre-Qualification Versus Pre-Approval

Mortgage Pre-approved and pre-qualification have the same benefits for those considering buying a home with a mortgage:

  • With either method, you can estimate how much credit you are likely to qualify for
  • This saves you time by searching for accommodations and only looking at homes that you know are perfect for your budget
  • You also avoid the frustration that the house you want to buy is actually out of your budget
  • Either you have pre-qualification or pre-approval letter, both can show the salespeople that you are a serious candidate when applying
  • For the seller to accept your offer with a great deal of confidence, the seller might want to know that your mortgage application is pre-approved (as opposed to just pre-qualified) and your home sale will close

In addition to the advantages listed above, it is important to know that: both prior approval or prequalification does not guarantee that you will receive a loan from the lender. You also do not need to get a mortgage from a lender who have previously pre-approved or pre-qualified you. Although many home buyers prefer to apply for loan with the lender a pre-qualified or pre-approved them, you should always check around before applying for a mortgage.

Differences Between Pre-Qualification Versus Pre-Approval

Prequalification is often considered the first step in the mortgage process and pre-approval is the next step.

  • Prequalification provides the lender with an overview of borrower’s financial history, including income, assets, debts and credit
  • The lender will examine this information to give borrower an idea of what he or she is asking
  • Prequalified mortgages do not require documentation of your financial history
  • The pre-approval of a mortgage is very similar, but generally requires documentation and verification of your income, assets and liabilities
  • Credit verification is often required, which leads to a serious investigation of your credit report

What Should Home Buyers Get

Which one a borrower should get?

Given that the terms “mortgage pre-approval” and “mortgage pre-qualification” are often used interchangeably, it can be difficult to know which one is necessary.

  • It depends on how the lender determines whether you want a credit check or not, and what real estate market you are in
  • Be sure to ask your creditor how to “pre-approve” or qualify “(if credit checks are needed.)
  • Check with your real-estate agent for a more reliable version in your market
  • I would say if you utilize a competent and experienced loan officer and find a home that might not last, a pre-qualification letter is generally enough to enter into a contract, but if you have the time I recommend getting all the way through to a pre-approval signed by an underwriter (as good or almost as good as a cash offer most of the time)

If you have been denied a home loan or have any questions about real estate or mortgage please contact the author Dale Elenteny of Gustan Cho Associates at Loan Cabin Inc. at 630-479-2719 or text us for faster response. Or email us at dale@loancabin.com. Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322 has no overlays on government and conventional loans.

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