Pre-Approval Vs. Pre-Qualification
What’s the difference between someone who is “pre-approved” for a loan and someone who is “pre-qualified?” Is one better than the other? And if so, how?
In general terms, the idea behind pre-qualifying is this: You’re a home buyer. You do not have enough money to buy for cash (do not be distressed, this makes you absolutely normal). The result: Your ability to buy depends on your ability to borrow, so it makes sense to speak with lenders before looking at houses to check your mortgage power and consider which loan program might be best for you.
So here’s the difference:
“Pre-qualification” is an estimate of borrowing power. It is a statement from your lender saying “based on your income & debt levels” you are qualified for a mortgage for “x” amount of dollars. This can be accomplished by a simple phone call to a lender. They may also run a credit report.
“Pre-approval” is likely to be a more formal process. Here you have actually sat down with the lender, supplied him with your last 2 years income tax returns, bank statements, W2’s, etc. The lender has asked about your employment & also runs a credit report. This is a more complete process.
Also, a pre-approval, helps take the guesswork out of buying. In other words with a pre approval you are closer to getting a mortgage commitment than with a pre-qualification. In the eyes of a seller, you are therefore a “stronger buyer” than the pre-qualification buyer. This is also more helpful in negotiating a better deal for you & makes you feel more comfortable with understanding the process & how it works.
Neither a “pre-approval” nor a “pre-qualification” are seen as absolute loan commitments. Lenders still need to look at property appraisals, verify information, and in many cases, re-check credit before agreeing to make a loan.
If a pre-approval or pre-qualification is less than a full loan commitment, why should buyers bother?
By speaking with a lender you can get an informed idea of how much you can afford, which homes are in your price range, and which loan programs might be best for you. Also, you will learn how much cash you will need to close the deal. It’s all a very important part of the real estate process. It also helps demonstrate you are a serious & motivated buyer.