As you prepare to finance a new home, chances are you’ve heard the terms “Pre-Qualification” and “pre-approval.” Although many real estate buyers use these terms interchangeably, they’re different. Therefore, as a homeowner, understanding these differences ensures you know which to get.
So What’s The Difference Between Pre-Qualification and Pre-Approval?
Normally, this is the first step in the mortgage process, and it requires you to provide an overview of your financial history to your lender. This includes credit score, debts, assets, and income. During the pre-qualification process, your lender reviews all your financial information and gives you an estimate on how much you can probably afford.
Pre-qualification is often referred to as a quick estimate because it doesn’t require much. For instance, you need to provide your phone number, name, and numbers to show your income, debts, and assets.
It’s vital to note that for a pre-qualification, the information you provide is unverified. Hence, there are no guarantees that you’ll get approved for the same amount.
Benefits of Pre-Qualification
Some of the benefits of getting pre-qualification include:
• It’s suitable for first-time homebuyers
• It helps you estimate what you can afford
• It does not affect credit score
• It requires no fees
The pre-qualification process is usually quick, taking one to three days for a buyer to get their pre-qualification letter. However, some home sellers may not take you seriously with a pre-qualification.
Pre-approval is often the next step in the home buying process, and it involves providing your lender with documented financial information. This includes obligations, pay stubs, statements, and a credit report, which a lender reviews and verifies.
Once you’re pre-approved, you receive a letter showing your specific loan amount. However, being pre-approved doesn’t guarantee you a loan. You still have to undergo a rigorous process while waiting for your final approval.
Benefits of Pre-Approval
Some of the benefits of getting pre-approval include:
• It ensures you know exactly what you can afford
• It requires no fees, but some lenders charge an application fee for pre-approval
• It gives you negotiation power
• It allows you to close faster
Sellers always prefer buyers with pre-approval letters because it shows their intent to make a purchase. Remember, with a pre-approval letter, you don’t have to shop at the top of your price range. You can look for homes below the amount you’re approved for, leaving you with extra money to set aside for college funds and retirement.
Also, the pre-approval process gives you a better idea of the interest to be charged.
Which One Should You Get?
While both pre-qualification and pre-approval give you an insight into how much you can spend, the one you should get depends on various factors. These include your real estate market, if you want a credit check or not, and how your lender describes the services to you.
But, new home buyers are better off with pre-qualification as it doesn’t affect their credit score, while serious buyers that want to close in 90 days can get pre-approval.
Contact us today for more information about pre-qualification and pre-approval.