Mortgage Pre-qualification vs Pre-approval
When you are planning to buy real estate, whether you’re shopping for your first home or you’re moving into your ultimate dream house, the chances are good that you’ll need a mortgage loan. The right home loan can make living in your new house affordable.
At SIRVA Mortgage, some of the most common questions we get from clients have to do with mortgage pre-qualification and mortgage pre-approval. To help you understand the differences between the two and determine which option is best for you, we’ve put together this quick guide.
What is Mortgage Pre-qualification?
As you shop for a new home, sellers tend to prefer buyers who are already talking to a mortgage lender. Getting pre-qualified for a mortgage is the quickest way to show that you’re serious about buying a home but it’s not the same as being pre-approved.
A pre-qualification application usually involves a prospective borrower self-reporting some basic financial information to a lender. You will need to provide information about your income, assets, and debts to get pre-qualified.
Getting pre-qualified does not carry the same weight as a pre-approval because typically, the lender does not verify the information you have provided. The lender will most likely check your credit and credit score but will not verify any of your financial or other information. You will be provided with a pre-qualification letter that indicates your credit and only your preliminary financial information looks good.
Because it is only a preliminary process that involves no due diligence on the part of the lender, getting a pre-qualification for a loan is not a guarantee that you will be approved for the loan you want.
The most important thing to take away here is that getting pre-qualified for a loan and getting pre-approved are not the same thing. While some lenders might use the terms interchangeably, they send different messages to sellers, and are treated differently in the loan process. For many sellers, if the choice came down to accepting an offer, the pre-approved buyer would be more attractive than someone who only had pre-qualified status because there would be a lesser chance of the mortgage not being finalized.
What is Mortgage Pre-approval?
Mortgage pre-approvals carry more weight than pre-qualifications because in order to obtain a pre-approval, the borrower must submit verifying financial documentation to the lender to prove their creditworthiness. Usually, the lender will require proof of income, documentation of any financial savings or investments, and proof that you have a history of making your monthly loan payments on time.
The process to be pre-approved for a loan takes longer than a pre-qualification because the lender must complete some due diligence on the paperwork you submit. The benefit of getting pre-approved for a mortgage is that it shows sellers that you have met the basic requirements to get a mortgage. As we noted above, many sellers prefer to work with buyers who have a verified pre-approval letter.
It is important to note that being pre-approved does not guarantee that you will be given the money you need. For that, you will need to complete a mortgage application. The underwriting process must be completed, and additional due diligence must be carried out by the lender’s underwriting team. They will look at everything from your credit balances and your credit score to your liquid assets in determining your eligibility for approval.
The process to be pre-approved for a home loan is not difficult but it does require some time and attention in submitting the proper documentation. The process can be even more simple if your lender has an easy online asset verification process that you can complete at your convenience. Generally for a pre-approval, you will need to submit the following items:
- Copies of the latest pay stubs for you and any co-borrower(s) or a signed offer letter from an employer.
- W-2 form for the past two years for you and any co-borrower(s).
- Copies of the latest bank statements for all accounts.
- The most recent statement for your 401(k) and/or any other retirement account, if using a portion of your retirement funds for a down payment for the home or as reserves.
Alternatively, if the lender has the appropriate technology, you can utilize online tools to gather your income and asset information directly from your employer and bank/financial service providers, skipping the work of gathering and submitting the documents yourself.
The reason you will need to submit the above information is so that the lender can perform some preliminary due diligence and determine whether you have the means to meet your financial obligations should you be approved for a loan.
After you submit the necessary documents online, the pre-approval team will review your credit report and verify your information to determine whether you are pre-approved for a loan.
Once pre-approved, your mortgage lender will issue a verified pre-approval letter. You can show the letter to sellers and improve the chances of your offer being accepted. Many sellers choose to work only with pre-approved buyers.
Which is Better for Buyers, Pre-Qualification or Pre-Approval?
For buyers, it is important to understand the potential repercussions of choosing between a pre-qualification and a pre-approval before you approach a lender. The ease of getting pre-qualified for a mortgage may be appealing to some, but buyers who go that route should be aware that there are some potential drawbacks.
Most lenders provide both pre-qualifications and pre-approvals for potential borrowers, but we always encourage people to go through the simple process of getting pre-approved. We do that because we know from experience that pre-approved buyers are the most attractive to sellers. A letter showing that you have been pre-approved offers some reassurance to sellers that there is a strong likelihood that the buyer will be granted a mortgage and that the sale of their home will go through as planned.
When Should You Get Pre-Approved?
The question of when to approach a lender to get pre-approved for a loan to buy a home is one that looms large for home buyers. While there is no one correct answer that suits everybody, we can offer you some advice to help you time it correctly.
Prior to house hunting you should have a down payment saved and enough income to make a monthly mortgage payment and meet your other recurring monthly obligations. It may be helpful to review your credit report ahead of time at annualcreditreport.com so you can verify your active accounts and correct any errors or inaccuracies before your lender reviews the report. Even raising your credit score by a few points can make a difference.
We strongly encourage getting verified pre-approved before you look at houses. Keep in mind that your pre-approval letter will have an expiration date, but in most cases, you will have between 60 and 90 days to shop for a home and make an offer.
Buying a new home is exciting and getting pre-approved for a mortgage can make the process easier and less stressful than it would be otherwise.Click here to start the pre-approval process now.