In short, pre-approval is better than pre-qualification.
When buying the house of your dreams, it’s important to be prepared to submit your offer quickly, beating out other potential buyers. That means you should have the necessary paperwork to show the seller you have or can get the funds to purchase their home before you put in a bid. Documentation can be a pre-qualification note, a pre-approval letter or both from a mortgage lender.
Pre-qualification and pre-approval have similar purposes: Judging the loan amount you qualify for, showing the seller you’re a serious contender, and making your offer stand out. However, neither a pre-qualification or a pre-approval guarantee you’ll receive a mortgage or the listed interest rate from that lender. You’ll have to get a mortgage commitment letter to solidify a loan amount with a specific lender.
The two also have expiration dates of 60 to 90 days because your financial status can change at any time. You can take on new debt, have an increase or decrease in salary, or purchase a high-end item you’ll need to pay off.
Despite similarities between the two, getting pre-approved holds more weight due to its rigorous verification procedure.
Pre-Qualification For A Mortgage Loan
You can get a pre-qualification only or use it as your first step toward an approval. Pre-qualification is a rough estimate of the amount you can borrow from the lender based on information you’ve given them. Because the information is unverified, it doesn’t have the same impact as a pre-approval, but can be helpful to have as you start the homebuying process, especially for first-time homebuyers.
The process is simple and can typically be done online or over the phone for free. You’ll answer a few questions about your income, assets, and debt, so the lender can calculate an approximate loan amount. None of this information is validated and no documentation is required for submission. You’ll receive a letter one to three days later letting you know if you are pre-qualified and the estimated number.
A pre-qualification can give you an idea of the home price range and neighborhood you’ll be able to afford. It can start the conversation with a lender about your savings goals and financial needs.
For instance, if the loan amount is less than you would like, you can discuss how to get your finances in order to increase that number. Perhaps, the amount is higher than you expected, so you can look into homes with an extra bedroom or bathroom.
Speaking to a lender to get pre-qualified can also be the perfect opportunity to learn about the different types of mortgage options and which would be best for your situation: A fixed-rate loan, adjustable-rate mortgage, FHA loan, VA loan, or USDA loan.
Although pre-qualification isn’t the best way to prove to sellers you have the financial means to purchase their home, it can be helpful to keep on file to show sellers you took this extra step. It may just set you apart from others who haven’t completed a pre-qualification when putting in a bid to buy a house.
Pre-Approval For A Mortgage Loan
The mortgage pre-approval process involves a deep-dive investigation into your financial history. Because this process verifies your data, it’s a better indication of your ability to borrow the necessary funds, as well as your potential interest rate. It also gives you a more accurate picture of the price range and neighborhood you’ll be able to afford.
A pre-approval is a bit more involved than filling out an online application or spending a few minutes on the phone with a lender. The process may require a fee up to several hundred dollars and in-person meetings with a lender. Once you complete an official pre-approval application, you’ll need to provide proof of income, assets, and identification to the lender, who will then verify all information is correct. The lender will also check your credit score.
The documents you’ll need include:
- At least one month of pay stubs
- W2 forms
- Personal federal tax returns
- Freelance or business tax returns (if applicable)
- Benefit award letter (if retired)
- Bank statements of all accounts and stocks
- A signed and dated gift letter (if someone is helping you pay for the home)
- Driver’s license
- Social security card
After a background check and review of your finances, the lender can provide you with a conditional commitment letter for the exact loan amount and interest rate you can receive.