How Are Pre-Qualifying And Pre-Approval Different?
The phrases “pre-qualification” and “pre-approval” are often used interchangeably by people who are new to the home buying process, but these two ideas do represent very different processes. Understanding the difference between the two ensures a future homeowner’s best chance of getting the home of his or her dreams.
Pre-Qualification is Informal
Before shopping for a new home, a buyer will want to know how much he or she can spend on a new residence and not experience financial hardship due to mortgage payments. The process of pre-qualification is a simple process that gives a homeowner a ballpark number on how much mortgage he or she can afford.
The process usually requires nothing more than a short call to the borrower’s lender. During the call, the borrower will give the lender some basic financial details and will be given a number of the size mortgage the family could afford. The borrower will share information like current income, existing debts, and the amount expected for a down payment, and will be given a number for the amount that is safe to spend.
It’s essential to understand that this type of application carries zero obligation for the borrower or the lender. Pre-qualification is only a tool to ensure a home buyer doesn’t try to purchase a home that is beyond the family’s financial capabilities.
Pre-Approval Process Shows Willingness to Commit
The process of becoming pre-approved showcases a lender or bank’s intent to give money to the borrower for a mortgage. The lender usually requires all of the standard documents associated with a loan, such valid statements of income as well as long-term debts. The bank runs a credit check during the process, and usually won’t grant pre-qualification to a borrower with a low score.
The reason why pre-approval is helpful during the home buying process is that it shows to the seller that a home buyer is ready to sign on the dotted line. Sellers often give preferential treatment to buyers who make an offer with pre-approved status.
Seeking pre-qualification before the home search begins is important, because it may guide the decisions a family makes in searching for a home. It can be devastating to find a home in a perfect neighborhood only to learn it’s out of reach. Likewise, obtaining pre-qualification before making an offer on a home helps a family to bring a strong bargaining chip to the table when making an offer.
