Pre-Approved? Here's What You Need To Know.
If you’re looking to buy a home, a couple terms you might hear getting thrown around are things like “pre-qualified” or “pre-approved," but what exactly are they and what’s the difference? It’s a fair question to ask and it’s understandable why there’s some confusion around these, because they're sometimes used interchangeably, BUT - there are in fact some key differences that you, as a home buyer, will want to be aware of as you embark on your home buying journey.
The purpose of both at their core is to help boost confidence for the seller in knowing that the borrower will have the means to fund the purchasing of the home and can therefore take their offer more seriously. In highly competitive markets, it may even be unrealistic to try and buy a home without getting pre-approved or pre-qualified.
Breaking it down: Pre-qualified
Getting pre-qualified is essentially the first step in the home buying process and requires less work and initial commitment than getting pre-approved. Every lender will be a little different in how they define pre-qualification and what their specific criteria are, but they’re all going to want to get a good understanding of your financial situation. They’ll probably ask you questions regarding your income, debts & liabilities as well as assets. This shouldn’t involve money nor an analysis of your credit reports. Overall this part of the process should be pretty quick. You can probably expect to get through it all and get your pre-qualification letter in about one to three days.
Everything at this stage is still fairly non-committal, both for you and the lender, since everything is based on self-reported information. It’s just a helpful way to gauge what your price range can be when looking at homes. If you end up shopping for homes that are way above your affordable price range you’ll end up either having wasted your time or rationalizing your way into a poor financial decision. Sticking to what you can afford will simply make life easier and better for everyone involved.
Breaking it down: Pre-approved
Now from here, getting pre-approved would be the next step where now you’re not only seeking confirmation of your creditworthiness but also getting a lender to say they would be willing to lend you a specific amount. Things will be much more involved and thorough for this part of the process. For example you’ll need to fill out a mortgage application, get a credit history check, seek out interest rate information and possibly even pay an application fee. You’ll also need to state an estimate of your down payment and complete review of all your finances. Although doing all this can seem a bit more cumbersome than just getting pre-qualified there is a competitive advantage as a buyer to submit your offer with as a pre-approved borrower.
Why? Well if you put yourself in the shoes of a home seller, who would you prefer? Someone who may likely get a mortgage loan or someone who’s saying they’ve already got the money lined up? Pretty obvious choice right?
Do note here that although you are being much more thoroughly vetted when getting pre-approved, you are still not obligated to borrow from that specific lender. In fact when you’re getting your credit pulled you have a 2 week window where you’re allowed to shop around with different lenders to try and get the best deal that you can. As a good safe measure it may be best to inquire with at least 3 different lenders to help build your confidence when you finally decide on one.
Even at this stage, just like you’re not fully committed, neither are these lenders. Do not confuse being pre-approved as being a guarantee that you will get the loan. If you do decide on a home and lender there are still a few final steps you’ll need to work through such as getting the home appraised by a third party contractor to determine the home’s value or investigating any possible structural problems. Only once everything is finalized will you be able to obtain your loan commitment which is an agreement between you and your lender that specifies a sum of money they will be willing to let you borrow.
We hope this breakdown has been helpful - make sure to download our app to get your home buying journey started.