The Difference Between Mortgage Pre-Qualification and Pre-Approval

Have you heard people talking about getting pre-qualified or pre-approved for a mortgage loan? Both terms describe the process of figuring out how much you are likely to get approved to borrow from a lender so you have an idea of how much home you can afford when you’re looking for houses, but there is a little bit of a difference between the two, and it’s important to understand the nuance.

What’s Pre-Qualification?

Pre-qualification is generally considered the first step in a mortgage loan process, and it’s designed to be a quick approval to give you an estimate of how much you can borrow. You will provide the lender with an overview of your financial picture, including your existing debt, your income, and any assets that you own. In return the lender will tell you how much they might be able to loan you to purchase a home. Usually the pre-qualification process can be done over the phone or in person, and sometimes you can do it online as well. It doesn’t usually include an in-depth credit check or financial analysis and is intended as an estimate.

Pre-qualification gives you the chance to talk to your lender about what loan options are available and discuss questions you might have about why the number is lower than you anticipated, or what you can do to increase it if you think you might want to borrow more. It’s also not a guarantee because it’s based only on the information you provide to the lender—if they find something in the in-depth credit check that you did not disclose it could change your ability to get a loan.

What’s Pre-Approval?

Pre-approved is generally a term used for a more in-depth analysis of your financial picture. You get pre-approved by filling out an official mortgage application, paying a fee, and providing the necessary documentation for the lender to do an extensive credit check. The lender then comes back with a specific amount that they are able to lend and you can find a home that fits your budget. You can also get an estimate of the interest rate you will qualify for, and may be able to lock in a rate if you think they might go up.

While both processes will give you an idea of how much you can borrow, and the exact difference between the might seem small, it’s important to understand the differences. The latter, pre-approval, often shows sellers that you are serious about buying a home and that you are one step closer to being able to obtain a loan.

Another advantage of getting pre-approved is the ability to shop for a home that is at or below the range you have been approved for with confidence that you will be able to get a loan to purchase the home. That way you won’t end up wasting time looking at homes and making offers only to find out you can’t get a loan for that amount.

To find out more about pre-qualification and pre-approval and talk to a mortgage lender today about how much you can get in a loan, call Altius Mortgage today.

Loan Tips for First-Time Homebuyers

If you have been dreaming about buying your very own home, there has really never been a better time than right now. Home prices are relatively stable, and interest rates have been at record lows for quite a while. Plus the months between March and July are usually the best times of year to find inventory on the market. Before you dive into your home buying experience, though, there are a few things you should know as a first-time homebuyer to ensure that you get the best loan and the best rates.

1: Know and Understand Your Credit Score

Your credit score is perhaps the most important number in your life when it comes to getting a mortgage loan. Even small changes in your credit score can have a significant impact on your interest rate, so before you start shopping for a home, check your credit score.

Credit scores are expressed as a number between 300 and 850; higher scores mean that lenders are more confident in your ability to repay a loan. Generally a score of 720 or above is considered excellent credit, 650 to 720 is good, between 500 and 650 is fair or poor, and below 500 is considered bad credit, although each lender might have its own ranges that differ slightly from the ones above.

2: Have the Best Credit Possible When Going for a Loan

If your credit score is lower than you would like, it might be a good idea to wait a little while before applying for a loan. Take these steps to improve your credit score:

  • Pay all your bills on time
  • Review your credit report for mistakes and fixing any problems
  • Pay down high balances on your existing credit accounts
  • Don’t take out any big new loans (student loans, car loans, etc.) in the months prior to getting a mortgage loan

Fixing a lower-than-desirable credit score can take some time, so you should start this process about 6 to 12 months before you plan to get your loan.

3: Have Your Documentation Ready

In order to get a loan you will need to have documentation of your income and taxes. Typically lenders like to see at least two paystubs, and two years’ worth of W-2s and tax returns, as well as bank statements from the last couple of months. If you are self-employed or you are paid on commission, be prepared to provide even more documentation of your income to qualify for a loan.

4: Set Your Budget

Ideally you should already have an idea of how much you want to spend on your monthly house payment, which will give you an idea of how much you can afford to borrow, but it’s always a good idea to track your spending for a few months to be sure. Keep in mind that most mortgage payments also include homeowners insurance, property taxes, and mortgage insurance (if you are not putting 20 percent down), so your calculations need to take that into account. Most lenders prefer that homeowners spend less than 28 percent of their income before taxes on a house payment, and less than 36 percent of take-home pay on a mortgage.

When you’re ready to get started, the next step is meeting with a knowledgeable mortgage lender in Utah to find out what loan options are going to work best for you and getting pre-qualified so you can start looking for the home of your dreams.