If you’re getting ready to buy a home, the place to start is with your lender.
Once the lender has determined how much you can borrow, they will give you either a pre-qualification or pre-approval letter to present with your offer. So what’s the difference and which one should you request?
A pre-qualification is a relatively easy to obtain and not very valuable initial evaluation of your credit worthiness as a potential borrower. It is typically used to determine the estimated amount you can afford to borrow. Pre-qualification looks at your income and expenses in order to generate an estimated borrowing range that you should be able to repay to a lender.
A pre-qualification amount is not a guaranteed amount that a financial institution would approve. It is simply an estimate that gives you an idea of what you can afford to purchase.
To pre-qualify, a loan officer will take some of your information (employment, income, assets, current debt) and make a tentative decision without verifying any of it. Typically with a pre-qualification, you won’t even give your social security number so there is no credit check.
A pre-approval is an evaluation by a lender that determines whether you qualify for a loan and the maximum amount that the lender would be willing to lend. The pre-approval process involves a thorough look into your income and expenses, a look at your credit report and score and a confirmation of income.
A pre-approved mortgage is still subject to review once a specific property has been chosen, so the specific dollar amount is not guaranteed. However, as long as no major income or credit changes occur between the time of pre-approval and the actual purchase of a home, the dollar amount of the pre-approval should be good.
If you’re searching for a new home, see a lender for a pre-approval letter. That way, you’ll know the price range you can shop. When you present an offer with a pre-approval letter, the seller knows you have already taken steps to qualify to buy their house. Again, a pre-approval letter from a lender is not a guarantee that the loan will be provided, but why start the process without knowing where you stand?
Good luck and let me know how it goes!