Pre-Approved or Pre-Qualified? How to Decide
Pre-qualification and pre-approval are both a part of the mortgage application process. All home buyers who apply for a mortgage must go through these processes. To show they are able to qualify for a mortgage, most buyers will start the mortgage application process before making an offer on a home.
If you're thinking about buying a home, it's important to know the difference between pre-qualification and pre-approval. Knowing the difference can help you decide what you need to do in order to make a competitive and attractive offer when you find a home you wish to buy.
What Is Mortgage Pre-Qualification?
Mortgage pre-qualification is the first step that a home buyer must take in order to become qualified for a mortgage. This step is surprisingly easy, because it's a very limited gauge of a home buyer's ability to repay a home loan. During the pre-qualification process, the lender asks the potential borrower a series of questions relating to their financial status, including information about their income, assets, taxes, debts, monthly bills and investments.
The borrower typically answers these questions with approximations. The entire process usually takes place over the phone. Answers are given verbally and are recorded into a computer system, which then calculates how much money the lender might potentially loan to the borrower, if the borrower's answers are accurate.
This step of the mortgage application process is often not very accurate, because borrowers often misremember or accidentally misrepresent their financial status when talking on the phone to the lender.
What Is Mortgage Pre-Approval?
Mortgage pre-approval is the second step of the mortgage lending process. During mortgage pre-approval, the lender collects paperwork that supports the borrower's answers given during the pre-qualification process. This paperwork can help the lender verify more accurately whether the borrower is a good candidate to take out a mortgage.
When Is Mortgage Pre-Approval Most Important?
Pre-approval is always helpful during the home buying process. Home buyers who are pre-approved have an advantage over home buyers who are pre-qualified, because even if a pre-qualified buyer makes a more competitive offer, the pre-approved offer is more reliable. Pre-approval also shows that a home buyer is organized and perhaps more serious about purchasing a home.
That said, there are times when pre-approval is even more helpful and important. In a competitive housing market where many buyers are competing against one another, pre-approval is almost a must. Home buyers who have less money to offer and who are in a weak position to compete against other buyers should also consider pre-approval to give them an advantage over pre-qualified buyers.
What Else Can You Do to Make a Competitive Offer?
Buyers who want to ensure they can make the most competitive offer possible should save money for a down payment, and should also be prepared to make a large earnest money deposit up front.
Working with a capable real estate agent can help as well. A good real estate professional can help the buyer make decisions that will make their offer look better to home sellers. Real estate professionals can also direct home buyers to markets where they will be able to compete realistically against the other buyers.
What Can You Do to Get the Most Out of the Home Buying Process?
If you're thinking about buying a home sometime in the next several months, there are many things you can do to be prepared.
Get Financially Organized
Check out your credit score and credit history. Work with the crediting bureaus to correct any errors that you find on your credit history. Gather all of your financial documentation including pay stubs, bank statements and tax documents.
Talk to a Lender
Contact a lender to get pre-approved and find out how much money you're qualified to borrow. This can help you set a budget and start looking at homes that you can afford.
Know What You Want
Visit neighborhoods and look at homes that you can afford, based on the amount you're qualified to borrow. This can help you decide whether you're really ready to enter the Cadence NV home buying market at this time.
Find a Good Real Estate Professional
If you're ready to start looking at homes, contact a real estate professional with a reputation for excellence. Your real estate agent can help you find homes that fall in your budget, and can suggest neighborhoods you may not know about or may have overlooked.