The home buying process has a lot of steps to it and one of the most confusing for buyers will be the mortgage process. But if you need a loan to buy your dream home then it’s essential that you understand every step of the way. In your research, you’ll likely have heard the phrases ‘pre-approved’ and ‘pre-qualified’ at one time or another. Some people use these phrases interchangeably but, in fact, there are big differences between the two. These refer to two different stages in the loan process. One at the beginning, and one at the end of it. If you want your mortgage application to go smoothly with no interruptions, then read on to find out how these two stages differ.
Getting pre-qualified is the first step toward applying for a mortgage. It’s a simple process where you just have to provide a lender with an overview of your finances. This includes things such as income, debts, and assets. The lender reviews all this information and then gives you an estimate of how much you can expect to borrow. The key difference between mortgage pre-qualification and pre-approval is that just about anyone can be pre-qualified. That’s because it’s based entirely on the information you provide to a lender. The process only takes about 1-3 days. It won’t include a credit report or an in-depth look at your ability to buy a home. If the information you provided wasn’t complete or accurate then it doesn’t really count for much.
If you provide a pre-qualification letter with an offer on a home, then a seller will know that the quoted amount is only what you can expect to borrow. It represents no commitment from the lender and will be quickly overshadowed by any offer from a buyer with a pre-approval letter.
That said, getting pre-qualified can still be useful when it comes time to make an offer on a home. In some local markets, sellers make it a requirement to provide one with an offer. Getting pre-qualified will also give you a close estimate of how much you can expect to borrow. This will help you narrow down your home search for a place that fits your budget. It’s also the first step towards mortgage approval.
Compared to pre-qualification, pre-approval is a much more thorough process that will take a close look at all your finances. The process will take an average of about 30 days. If approved, it’s a definite confirmation that you’ll receive the funds you are approved for. Getting pre-approval requires all the necessary documentation for a thorough check on your financial background and current credit rating. In addition to getting a confirmed amount for how much you will qualify for, you’ll also know exactly what your interest rate will be. If you’ve already been pre-approved, then the process will move much faster as they’ll already have the documents you submitted.
Keep in mind though there is a lot of work in this process. You’ll need to provide an extensive number of documents that show your entire financial position. Expect to be asked for pay-stubs going back several months, W-2 forms, proof of assets, rental history, credit history, and tax returns. If anything crops up that seems suspicious then the underwriter will ask for further documents. It is vital to the lender that they assess you as a borrower and ensure you can make your payments in time. This requires a full picture of your financials which can feel invasive. But if you want that loan then this is what it takes.
Going through both stages will put you ahead of the competition when looking for a home. For a start, you’ll know exactly how much house you can afford. Secondly, you’ll be able to make an offer that will look a lot more secure in a competitive market. With a mortgage pre-approval letter, a seller knows your offer is serious and that you have the means to back it up. The last step in the mortgage process is the loan commitment. This is granted by the lender once they’ve appraised the house to see that its value matches the sales price. Once they have that and have conducted another check on your financials to see that nothing has changed, you’ll have your loan to complete the sale.