You have likely heard the importance of being pre-approved or pre-qualified for a mortgage before beginning to look at homes. These terms are often used interchangeably, but there are important differences to keep in mind.
pre-qualification
A pre-qualification letter is a ballpark estimate based on information you provide to your lender without actually applying for a loan. The letter will state that you are qualified to get a loan for a specific amount of money, subject to verification of the information you provided. Until you complete and submit a loan application, the lender really doesn’t look too closely at your finances or history. Because a pre-qualification letter contains large disclaimers as to your financial security, it isn’t the preferred method of providing proof to a seller that you will be able to get a loan.
pre-approval
Once you settle on a lender, but before you start looking at homes, you will need to apply for a loan. The loan application will include gathering documentation to back up your financial situation as well as a credit check. At this point you will have a better idea of interest rates since they are based in part on your credit score. You will receive a conditional commitment for the exact loan amount, allowing you to look at homes at or below that price point. The pre-approval process is designed to verify all the information you provide to your lender and to make sure that you meet all the requirements for a loan. Having your mortgage application and pre-approval out of the way enables you to avoid looking at homes that don’t fit within the parameters of your approval as well as move quickly when you find the perfect home.
Did you know?
most sellers will require a pre-approval letter to be attached to any offer. They want to make sure you have spoken with a qualified lender and can follow through with the purchase of their home.
