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.
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.
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.