Getting a mortgage usually involves getting pre-qualified or pre-approved for a loan at some stage in the process. Although pre-qualification and pre-approval are both stepping
stones to securing a home loan, they are actually quite different, and it’s important to understand the difference between the two. They require different types of information, offer different types of benefits, and are useful in different situations.
Knowing whether you should seek pre-qualification or pre-approval for a loan can make the difference between sealing the deal on your dream home or losing it to another buyer. So read on to understand what both processes entail.
What is Pre-Qualification?
Pre-qualification is often the first step of the mortgage process. When lenders pre-qualify you, they take unverified information about your current financial situation in order to tell you how much you’ll likely be approved for. While some sellers may not take your bid very seriously with pre-qualification, it can be a great starting place and a reality check for you as you get ready to buy a home.
What Documents are Required for Pre-Qualification?
To receive pre-qualification for a loan, you’ll need to provide a lender with some basic information about your finances. The lender will request figures to assess how much you earn on a regular basis, understand what kinds of assets you have, and see how much debt you’ve already accrued.
After you provide these answers, the lender will take this unverified information and use it to determine how much you’re likely to be approved for should you apply for a loan. Since this process is relatively informal, pre-qualifying for a mortgage does not guarantee that you will ultimately be approved for a mortgage for that same amount.
What are the Benefits of Pre-Qualification?
As you can see, pre-qualification is basically a quick and simple estimate of how much you can afford based on your current financials. However, pre-qualifying doesn’t guarantee you’ll get approved for that amount. So why bother getting a loan pre-qualification if it’s not guaranteed?
Here are a few reasons to go ahead with pre-qualification:
- It’s a great tool for first-time homebuyers. If you have no idea where to start with getting a mortgage, pre-qualification can be quite illuminating. It will show you what lenders will be concerned with and give you a small taste of what the mortgage application process will be like. This experience can be valuable in terms of helping you prepare for securing your home loan. Pre-qualification will show you if you’re able to support a mortgage, and how much you can comfortably afford.
- It helps you estimate what you can afford. Taking a look at your current financial state is important for determining what you can afford. Knowing how much you’ll likely be able to borrow for a new home will determine what your final budget is, and that bottom-line will help you narrow your search for new homes within your budget. Having an idea of what you can expect to pay each month will let you plan for upcoming expenses. If you currently rent, you will be able to see how buying a house will impact your monthly expenses so that you can begin to prepare for your next steps.
- It doesn’t impact your credit score. Pre-qualification is a way to get an idea of what you can expect to get from a mortgage. Since it doesn’t guarantee your final outcome, no hard pull of your credit report is required. If you’re not quite ready to pull the trigger on the purchase of a new home, this is important. Each time a lender pulls your credit report, it can negatively impact your credit score by about five points. You want your credit report to be in the best shape possible, and all those five-point dings can sink your score. The higher your score, the better mortgage terms you’ll be able to access, especially when it comes to interest rates.
- It doesn’t cost you anything. Sure, you’ll need to spend some time with a mortgage lender or broker to complete the pre-qualification process, but they won’t charge you any fees to do this. It’s a service that prepares you both for what steps to take down the line, so don’t expect that you’ll need to pay for anything just yet.
How do you Pre-Qualify for a Mortgage Loan?
Speak to your mortgage lender and request to be pre-qualified for a mortgage loan. They’ll ask for information about your income, assets, and debts to get a picture of your current state of finances. Then they’ll tell you how much you’ll pre-qualify for.
What is Mortgage Pre-Approval?
Getting pre-approved for a mortgage goes a step beyond pre-qualification in that you need to submit verifiable proof of income, debts, and assets to get approved for a specific loan amount. There are still no absolute guarantees that you’ll be approved for that amount, but it’s more likely than with pre-qualification. To obtain pre-approval, lenders won’t just take your word for it. They’ll require that you show proof and give you a more specific loan amount.
What Documents are Required for Pre-Approval?
Your lender will request your financial information in the form of pay stubs, bank statements, obligations, tax returns and your credit report. Upon receipt, the lender will review and verify each piece to give you an accurate loan pre-approval amount.
What are the Benefits of Loan Pre-Approval?
Sellers love getting offers from pre-approved buyers. In fact, if you’re involved in a bidding war against other buyers who are not this far along in the mortgage process, the seller may choose the pre-approved buyer, even if that bid is slightly lower than a competing bid without pre-approval. Here are some of the other benefits of pre-approval:
- It speeds up the closing process. Closing on a mortgage that you’ve already been pre-approved for is a lot faster. Since the lender has verified your current documents, they’ll only need to be brought current and taken with information about the property that you’re buying in order to close quickly.
- It gives you negotiating power. Sellers will take your offer seriously when you have a pre-approval in hand. This shows that your money is together and that you are ready to move and close on their property quickly.
- It shows you know exactly how much you can afford. Giving verified documentation to your lenders entitles you to a more specific pre-approved loan amount. Though the final number may vary if some piece of your financial situation changes, it gives you a more concrete idea of what you can spend on a new home and what you’ll need to pay each month. You’ll even get an estimate of what you can expect that your down payment and closing costs will be.
- There are no fees for loan pre-approval. Pre-approval is just another step on the journey towards securing your mortgage. It’s essentially like a dress rehearsal for the real thing.
How do you get Pre-Approval for a Mortgage Loan?
Contact your lender for mortgage loan pre-approval. They’ll request that you transmit copies of the required documents through a secure portal. Once they receive your information, they’ll review what you’ve sent and verify it. If your lender needs more information or an explanation from you, they’ll ask. When your lender is ready to pre-approve you, they’ll let you know what mortgage terms you can expect if you were ready to apply right now. Getting an online pre-approval is pretty straightforward and can often be accomplished in one day if you have all of your documents handy.
Additional Read: Mortgage Pre-Approval Tips
How to Determine the Right Choice for You
The main distinction for pre-qualification and pre-approval is that they are helpful at different times of your home buying process. If you’re just starting the home buying process, pre-qualification is a great way to get an idea of what you should expect. Without the credit impact and verified information required for pre-approval, pre-qualification will help to save you time by narrowing your housing search to what you’ll likely be able to afford and by preparing you for other steps of the mortgage application process.
If you plan to purchase a home within 90 days, get pre-approved. Mortgage pre-approval is imperative if you’re looking to buy a home in a hot housing market as they often sell quickly and you want to be prepared to take swift action. Since sellers appreciate buyers with pre-approvals in hand, your offer will stand out in a bidding war and you will be able to close more quickly than you would without one.
Reach Out to A and N Mortgage
Whether you’re ready to embark on your home buying journey with mortgage pre-qualification or prepared to obtain mortgage loan pre-approval, contact the professionals at A and N Mortgage. They work with the best mortgage bank in Chicago to help you get pre-qualified or pre-approved for your dream home and their decades of experience will help guide you through these processes as easily and quickly as possible.