The experience of buying a home is more enjoyable when you’re able to stay one step ahead of the process. If you have already followed our checklist for preparing to buy a home, it’s time to get pre-qualified and pre-approved for a home loan. These two are not necessarily the same, and serious buyers are encouraged to pursue both prior to officially entering the market for a home.
Pre-Qualification vs. Pre-Approval: What’s the Difference?
Getting pre-qualified means meeting with a lender to discuss your current standing for a home loan. The goal is for you to leave the discussion with a ballpark figure of the loan amount you qualify for, along with an understanding of the different loan options that are available to you.
A pre-approval is a more in-depth evaluation in which the lender looks closely at your financial background, which we’ll discuss in more detail shortly. In order to get pre-approved, you will typically fill out an application, pay a fee and agree to a background check on your finances. Once the process is complete, you will receive a printed letter outlining the exact loan amount you are approved for, possibly with an exact interest rate as well.
The reason to seek pre-qualification and pre-approval is so sellers can immediately see that you have the means to buy. Doing so will also enable you to move quickly when you come across a home you like because you will have already confirmed how you will obtain financing. This is especially advantageous in a competitive market, where homes sell fast and sellers often take the deal that poses the lowest risk of falling through.
What to Expect During Pre-Qualification
While being pre-qualified doesn’t yield any true “rite of passage” with sellers, it is a worthwhile and approachable first step that will naturally lead you to the more substantial pre-approval. During the pre-qualification interview, the lender will consider your income, assets, debt, and credit on a surface level. The interview can take place in person, over the phone or often even online.
If you’re considering several different lenders, this is a good time to shop around and see what each of them will offer. It’s also a chance for you to learn about the different types of mortgages, including the benefits and drawbacks of each. Again, it’s important to understand that the figures you receive in pre-qualification are unofficial and not guaranteed.
A pre-approval requires the lender to conduct a more extensive check into your finances and credit history. As such, you will want to gather the documentation beforehand to avoid any unexpected holdups. This includes:
- W2s from the past two years and pay stubs from the past two pay periods
- Letter of employment with employer’s contact info
- Tax returns for the past two years
- Bank statements and investment account statements from the past few months
- Credit card statements from the past few months
- Photocopied identification
- Social security number
- The lender’s pre-approval application and fee
- Any additional documents required by the lender
It’s also helpful to know your credit score going into the meeting, although the lender will run their own credit report with a portion of the application fee. All of this is simply to confirm that you are financially responsible and capable of buying a home. The more organized you are upfront, the sooner you will be able to learn the loan you are pre-approved for.
When all goes well, it’s common for the borrower to leave the pre-approval meeting with their letter in hand. Remember, this is crucial to knowing what you can afford, showing sellers you can afford it and gaining a competitive edge against other buyers all at once. It’s possible to make an offer with only a pre-qualification letter, but not recommended. Consider the pre-approval as your way of showing sellers that you mean business, and keep in mind that it is only valid for a designated time frame (usually 60-90 days). If anything in your financial picture changes dramatically or you let the pre-approval expire, you will likely have to go through the process again.
Once you’re pre-approved, it’s time take a break from the paperwork and begin searching for your new home! Realize that all of the tedious legwork you’ve done to this point was undoubtedly worth your time. Now, you and/or your real estate agent can approach sellers in your price range with complete confidence that you have a realistic chance of getting the home you want.
We will provide tips for house hunting in the next article in this series. We believe that with time, coaching, and education, that you and your family can achieve the dream. Credit.org is here to guide you through pre-qualification and pre-approval with our pre-purchase homeownership coaching.