Getting a mortgage? Here is why pre-approval is better than pre-qualification
When you are in the market looking for a home, you have two options: you can either buy it for cash or take out a mortgage. Most folks choose the second option for obvious reasons. People don’t have hundreds of thousands of dollars lying in their bank account. Even if you do, you may like to take advantage of low interest rates and invest the cash in something that offers a higher ROI.
If you are going for the second option when buying a home, you should know that pre-qualification and pre-approval are important steps in the mortgage approval process. Most people believe pre-approval and pre-qualification to be the same thing, but they are not.
Let’s discuss in detail how pre-qualification is different from pre-approval and why it is always better to get pre-approved:
Pre-qualification
Pre-qualification is basically a ‘loose’ estimate of how much loan you will qualify for based on the information you provide to the lender. The lender evaluates your credit worthiness after getting basic details of your annual income and expenses and gives you an estimate of a certain loan amount you will be eligible for. Your lender may not even pull out your credit score when providing you with a pre-qualification letter.
A pre-qualification letter doesn’t give any warranties. What it basically means is that you can’t be certain you will be approved at least the amount of loan mentioned in the letter. The actual loan amount could be smaller or higher than the amount specified in the pre-qualification letter.
Pre-approval
A pre-approval is a more definitive estimate of the mortgage amount. A lender will evaluate your credit history thoroughly before providing you with a pre-approval letter. Applying all the underwriting norms, your lender will take into consideration your credit score, employment history, assets, liabilities, your current income and future prospects of income. This information will be verified with relevant documentary proof.
After getting a pre-approval letter, you can be pretty much sure how much loan you will be approved.
Why pre-approval?
You should get pre-approved before you make an offer on a home. Here is why:
- You will be able to determine your budget more precisely because you will know for sure the loan amount you will qualify for. You will look at only properties within your budget.
- The seller will take your offer more seriously if you are pre-approved. Sellers are usually apprehensive of the possibility that the buyer’s financing may not come through and the deal may fall apart at the last moment. You can demonstrate your credit worthiness with a pre-approval letter.
- As mentioned earlier, a lender evaluates all necessary documents before pre-approving your mortgage application. It will save a lot of time because you won’t need to arrange these documents at the last moment during the escrow period.
Conclusion
When you have absolutely no idea how much loan you will qualify for, you can get a pre-qualification letter from a lender, but when you are in a more serious phase of the home buying process, you should get pre-approved.