Buying a home? You’ve probably heard that getting pre-approved or pre-qualified for a loan is an essential step forward in the process. But what’s the difference?
Getting pre-qualified is a relatively quick and simple process. The lender does an initial review of your income and expenses to generate an estimate of the loan amount you could likely afford to repay.
This is not a guaranteed loan amount as it does not involve an analysis of your credit report or an in-depth look at your ability to purchase a home.
So why get pre-qualified? The estimate provided allows you to have a realistic discussion with your lender and realtor so you can focus your search on homes that you can expect to afford. If you’re a first time home buyer and don’t know what to expect, or simply just want time to browse, this is a valuable part of the process.
A pre-approval is an in-depth assessment that gives you a specific loan amount that the lender is willing to move forward with — provided there are no major changes to your financial situation during the home buying process and that the home meets certain specifications.
You’ll complete a mortgage application, provide all necessary documentation, and may pay a fee. The lender will do an extensive check of your credit and financial background, and will approve you for a loan amount. They will also give you an idea of the rate you’ll be charged, which will help you estimate your monthly payment. Once you find a house, the lender will evaluate the property and finalize the process before giving the final approval.
So why get pre-approved? A loan pre-approval greatly increases your bargaining power when negotiating your home purchase since the seller knows you’re serious about making an offer. If you’re planning to buy within 90 days and/or shopping in a competitive market, a pre-approval can be an essential tool for closing your home.
Can You Do Both?
Yes. You can get pre-qualified to start the home buying process, and then initiate the pre-approval once you’ve narrowed down your selection. Ideally, you will want to have the pre-approval ready before you plan on making an offer because it gives you a competitive advantage against other prospective buyers.