“You’ve Been Pre-Qualified!”
We’ve all received mailers and emails letting us know that our finances are in good shape to buy a house. The message usually goes on to say that you’re a great potential customer to become a homeowner. After a pre-assessment of your finances, credit history, and earning potential, a lender has determined that they would be willing to consider you for a home loan – provided that you meet all of the more advanced qualifications.
You can’t actually buy a home, or even make a solid bid, on pre-qualification alone. Pre-qualification is, however, often mistaken for pre-approval, which is the next and very necessary step in your home buying journey.
Mortgage Prequalification vs Pre-Approval: What’s the Difference?
Quick Answer: Pre-qualification is an invitation to apply for a loan. Pre-approval is something a lender grants when they are willing to lend you up to a certain amount for a mortgage. (Reference)
The difference between pre-qualification and pre-approval lies in the mortgage approval process. Consider the terminology. A mortgage is approved when the bank has gone through your application and confirmed that your finances are in order. Pre-qualification lets you know that a lender is receptive, but you don’t actually have an approved and ready-to-execute mortgage loan. That happens after you have filed an application and been pre-approved.
Pre-Qualification Is A Starting Point
So what is pre-qualification? Good question. Simply put, it is a process that gives you an estimate of the amount you are likely to be approved for by a lender. Think of it as a ballpark figure to guide your initial home buying process. A loan officer is likely to ask you about your basic finances, including income, debt, savings, and any other assets.
Pre-qualification does not involve running a credit report or a deep dive into your finances. It is a look at what you are likely to encounter should you move forward in the home buying process. Pre-qualification can be useful as long as you understand what it is and what it tells you. If you want to know if a lender is willing to lend to you (before going through the more detailed process of an application) ask to be pre-qualified. You can also take your pre-qualification letter to another lender as a way of comparison shopping.
Pre-Approved Mortgages are Bank-Certified and Ready to Execute
Now let’s talk about pre-approved mortgages and why they are essential to the home buying process. Whether or not you were initially pre-qualified, any mortgage lender in your home-buying region can accept your mortgage application and – if you meet the requirements – pre-approve you for a loan within your buying budget.
This pre-approval letter is what sellers and their agents are looking for when a buyer makes a bid. Without it there’s a much higher chance that your bid will fall through due to banking approval issues. With pre-approval, sellers can know for certain that the bank is already prepared to back your bid and they can take your numbers seriously. If you approach a seller with only a pre-qualification letter, you run the risk of falling behind a pre-approved buyer in the level of priority you are given. Pre-approval signals that you are ready to buy.
Why Are Mortgages Pre-Approved? Why Aren’t They Just “Approved”?
One common question is why the pre-approval step exists rather than a normal “approval” for mortgages? This is because there are several steps that can alter or affect the final price of the home and what the lender is willing to loan. A mortgage, once approved, is not executed right away. During negotiations, the price of the home may be negotiated higher or lower, changing the final details of your mortgage. Often, though not always, a lender will insist on a home inspection and appraisal to verify the condition and value of the property.
Only when the sale is closed is your pre-approved mortgage activated into its final mortgage form, at whatever price you agreed on in negotiations. Pre-approval is a unique loan readiness state just for the real estate market.
When to Request Pre-Qualification and Pre-Approval in Your Home Buying Timeline
So how should you build your home-buying timeline with mortgage pre-qualification and pre-approval in mind? Pre-qualification is a great first step to give you a good idea of the price range you are likely to be approved to borrow. You should wait to apply for a pre-approved mortgage until you are ready to begin bidding on homes, as most pre-approval letters have a limited time frame (usually between 30-90 days).
Explore Your Lender Options with Pre-Qualification
There are many lenders to choose from when you first start looking for a home in a specific region. Some will approve your mortgage, some won’t, and you don’t need to waste your time (or damage your credit score) by applying to all of them. Instead, requesting a pre-qualification is useful because it can tell you which lenders are receptive, and which are eager to have you as a customer. This can help you to refine your search for a good loan without impacting the rest of your home search.
Mortgage Applications and Your Credit Score
It is important to note that applying for a loan, including mortgages, can impact your credit score. This is what is known as a “hard credit check” and it occurs when a lender looks into your finances to determine if you are eligible for a mortgage. Hard credit checks can temporarily decrease your credit score – primarily to discourage rampant applications for loans.
The effect of the hard check means that home buyers need to choose their prospective lenders carefully, applying to one at a time, and few in total, to ensure the best final results in your home purchase.
Apply for a Mortgage Only When You (and Your Finances) are Ready
Because of the hard credit check, you should submit your mortgage application and get your pre-approvals only when you are almost ready to bid on properties. This ensures your pre-approval will still be valid (they often have a time limit between 30 – 90 days per letter) and you will minimize the number of hard credit checks on your recent financial history when it comes time to finalize your approved loan.
Now that you are equipped with insights on mortgage qualification and approval, you’re ready to use this knowledge to find the right house and lender for your upcoming home purchase! Contact us for more insights and answers to your real estate questions.