Pre-qualification vs. Pre-approval
Pre-Qualified
Getting pre-qualified is the initial step in the mortgage process,
and it's generally fairly simple. You supply a bank or lender with your overall
financial picture, including your debt, income and assets. After evaluating
this information, a lender can give you an idea of the mortgage amount for
which you qualify. Pre-qualification can be done over the phone or on the
internet, and there is usually no cost involved. Loan pre-qualification does not
include an analysis of your credit report or an in-depth look at your ability
to purchase a home.
The initial pre-qualification step allows you to discuss any goals or needs you
may have regarding your mortgage with your lender. At this point, a lender can
explain your various mortgage options and recommend the type that might be best
suited to your situation.
Because it's a quick procedure, and based only on the information you provide
to the lender, your pre-qualified amount is not a sure thing; it's just the amount
for which you might expect to be approved. For this reason, a pre-qualified
buyer doesn't carry the same weight as a pre-approved buyer who has been more
thoroughly investigated.
Pre-Approved
Getting pre-approved is the next step, and it tends to be much more
involved. You'll complete an official mortgage application (and usually pay an
application fee), and then supply the lender with the necessary documentation
to perform an extensive check on your financial background and current credit
rating. (Typically at this stage, you will not have found a house yet, so any
reference to "property" on the application will be left blank). From
this, the lender can tell you the specific mortgage amount for which you are
approved. You'll also have a better idea of the interest rate you will be
charged on the loan and, in some cases, you might be able to lock-in a specific
rate. With pre-approval, you will receive a conditional commitment in writing
for an exact loan amount, allowing you to look for a home at or below that
price level. Obviously, this puts you at an advantage when dealing with a potential
seller, as he or she will know you're one step closer to obtaining an actual
mortgage.
The other advantage of completing both of these steps before you start to look
for a home,
pre-qualification and pre-approval, is that you'll know in advance how much you can afford. This way, you don't waste time with guessing or looking at properties that are beyond your means. Getting pre-approved for a mortgage also enables you to move quickly when you find the perfect place. When you make an offer, it won't be contingent on obtaining financing, which can save you valuable time. In a competitive market, this lets the seller know that your offer is serious, and could prevent you from losing out to another potential buyer who already has financing arranged.
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