Home buying can be competitive. You aren't just looking for your dream home, you might be pitted against others who are in the exact same pursuit.
When shopping for a home, it's important to show a seller that you have the ability to complete the purchase. Why else should they take the house off the market in order to work with you? Lenders provide two free services to assist, but it's important to understand the distinctions of a pre-approval vs. pre-qualification.
Many people use the terms "pre-qualification" and "pre-approval" interchangeably, but there's actually a very big difference you should be aware of.
Let's be blunt. A "pre-qualification" isn't really worth the paper it's printed on! Technically, it's better than nothing, since it shows that the buyers had at least spoken with a loan officer, but it's not binding in any way and could have left out information that would affect an eventual loan approval. Many "pre-quals" are issued without a credit report, income or asset documentation being reviewed. These days more than ever, details matter, and once the borrowers documentation is received by the lender, it's very possible that their qualifications will change, invalidating any notion of the "pre-qualification".
A "Pre-Approval" is an actual commitment to lend and is issued by a lenders underwriter (not the loan officers opinion) only after a credit report, bank statements, paystubs, W-2's and possibly tax returns have been submitted. A "Pre-Approval" is an actual mortgage commitment, subject to a property, appraisal, contract of sale and title report. It doesn't cost any money or obligate the buyer in any way and lets the seller know that they have a legally qualified buyer worthy of consideration and negotiation. As such, every qualified home buyer should take this step in order to present themselves in the best possible way when making a serious offer on a home.
Key Takeaways: If you want to win the primary consideration of a house seller, take the time to get pre-approved. You don't want to take the chance of your home going to someone else who had this valuable foresight.