When you’re ready to move past the online perusal stage of house hunting onto actually seeing homes and (gasp!) possibly bidding, it’s definitely time to talk to a lender. Lenders can get you pre-qualified or pre-approved for a mortgage. But what’s the difference between the two? And how do you know which one to go for? Danielle Pennington, a loan officer at BestWay Mortgages, gives a great breakdown of each option, as well as advice on which one to pursue. (Spoiler alert: One IS better than the other!)
What’s the Difference Between Pre-qualification and Pre-approval?
According to Pennington:
“A pre-qualification is based on information you verbally give a lender and is a rough estimate of how much you can afford. There is no review of documentation.
“A pre-approval is a much more respected document. It shows your Realtor and the seller that your lender
has reviewed your credit, income, assets, and other related documents. A pre-approval means you are ready to purchase a home.”
In other words, a pre-qualification is kind of like a pre-test. You disclose basic information about your income to the lender, and he or she lets you know about how much of a home loan you’ll likely get. It usually doesn’t involve running your credit (though check on this with your lender beforehand) and doesn’t require you to provide verification of your financial claims.
A pre-approval, however, is much more official. The lender will run your credit, and you’ll be required to provide bank statements, tax returns, and various other forms of documentation. The amount of money you’re approved for is the amount the bank will actually lend to you, assuming nothing major changes about your financial situation.
Is There Any Point to Pre-qualifying?
It certainly won’t hurt, but if you want to get a mortgage, you’re eventually going to have to provide the necessary documentation to the bank, so it’s often recommended that homebuyers go straight to the preapproval process. Pennington typically gives this recommendation. She says that if you’re serious about buying a home, a pre-approval is the way to go.
However, if you’re just getting your feet wet in the house hunting process and you’re not ready to have your credit run, getting pre-qualified can be a good start.
Why Getting Pre-Approved Is Better Than Getting Pre-Qualified
Pennington has many reasons. In her words:
Pre-approvals carry more weight than pre-qualifications.
A pre-approval differs from a pre-qualification. With the former, the lender has actually checked your credit and verified your documentation to approve a specific loan amount.
A pre-qualification can be useful as an estimate of how much you can afford to spend on your home but it is a less accurate indicator of your ability to purchase. A pre-approval always carries more weight.
You’ll know how much house you can afford.
Getting pre-approved before you begin house hunting allows you to know how much house you can realistically afford. Knowing this narrows down the options and makes the selection process more efficient. Not to mention, it protects you from the unpleasant surprise of realizing the home you fell in love with doesn’t fit your budget.
It adds clout to your offer.
In many markets, homes attract more than one offer. If the sellers are weighing one offer against another, they may lean towards the one accompanied by a pre-approval letter. That’s because pre-approvals instill confidence that the buyer is financially capable of purchasing their home.
It increases your negotiating power.
In addition to strengthening your offer when compared to buyers who haven’t taken this step, getting pre-approved may give you the upper-hand when negotiating the price. If the homeowner is eager to sell, they may be more willing to accept a lower offer from someone they’ve been assured is financially capable of purchasing their home.
It saves time.
Obtaining a mortgage can be a lengthy process. Getting pre-approved ahead of time shortens the time between contract to close — this way you’re ready to proceed with finalizing the mortgage once you’ve found the home you want to purchase.
The Bottom Line
If you’re serious about being the winning bid, make sure you’re pre-approved, not just pre-qualified. Your bid will be taken more seriously, and in this seller’s market, buyers need all the help they can get.
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