Mortgage Pre-Approval VS Pre-Qualification | What’s the Difference?

Written by Posted On Sunday, 28 July 2019 08:25

Owning a home is a big dream for a lot of people. However, paying cash for a house is something only a few people can afford to do. Nevertheless, with the availability of different mortgage options, becoming a homeowner is no longer a farfetched dream. It’s now easier than ever to apply for a mortgage and obtain a pre-approval or pre-qualification letter from a lender.
Mortgage Pre-Approval VS Pre-Qualification | What’s the Difference?
A mortgage pre-approval letter is a document issued by a lender, following a thorough investigation of your creditworthiness. The lender will carry out a comprehensive analysis of your finances. This includes your income, assets, debts, rental history, credit score, proof of income, and anything else that might affect your overall creditworthiness. The info extracted from this analysis will determine how much money you can borrow. Sometimes this amount will be more than you can actually afford or want to spend and other times it’ll be lower than anticipated.
A mortgage pre-qualification letter, on the other hand, is an estimate of how much money you can borrow with little to no research. Essentially, pre-qualifying is not as detailed as pre-approval, as the lender does not investigate or verify your financial records or credit history. The issued document only shows an estimate of borrowing power. A pre-qualification isn’t worth the paper it’s printed on to most sellers and agents.
Interestingly, all you need to do to get pre-qualified is to talk to a lender about your current financial circumstances. They will then issue you a pre-qualification based on the information you provide regardless of whether it is factual or false. This right here is why sellers don’t take pre-qualifications seriously.
Other differences between pre-qualification and pre-approval
Pre-qualification does not require documentation
Pre-approvals normally require thorough documentation, including proof of employment, income, assets, and identification. Conversely, pre-qualification only requires your word, whether real or fake. Moreover, the lender may not even carry out a check to confirm your details before issuing a pre-qualification letter. This explains why obtaining this document only takes a few minutes.
Pre-qualification does not require an estimate of your down payment
When seeking a pre-approval, the lender will ask how much you can put down. This will help them determine which loan programs you’re eligible for. However, pre-qualifications don’t always go this far since the lender isn’t working with verified numbers.
Pre-approval may involve a fee
Pre-approval is a thorough process that involves running a credit check to determine your eligibility for a mortgage. Gathering all the relevant documentation may cost money. For this reason, the lender may demand a small fee to check your credit score before issuing you with a pre-approval document. This is extremely rare, but it could happen.
Pre-approval deals with actual figures
While pre-qualifications deal with estimates of your current financial standing, the basis of a pre-approval is on actual figures. Essentially, the lender will use your credit history and financial records to determine the exact amount you can borrow. They will then provide you with a good-faith estimate, which will provide actual numbers.Your mortgage principal and interest, property taxes, homeowners insurance and HOA fees.
Pre-approval enhances your credibility
Getting pre-approved portrays you as a serious buyer, by enhancing your credibility. Even though it does not guarantee that you will receive a loan, it goes a long way to demonstrate to sellers that you are a serious buyer. Moreover, you may use your pre-approval letter to become a certified homebuyer.
Final Thoughts:
To sum it up, a mortgage pre-qualification is a less formal determination of the amount you qualify to borrow. It’s based solely on the information you provide. On the other hand, a mortgage pre-approval is a formal process, whereby a lender runs an in-depth analysis of your credit history to determine the actual amount you can borrow.
The differences between mortgage pre-approval and pre-qualification might be enormous, but one thing remains the same – both documents do not guarantee a mortgage. After formally applying for a home loan the mortgage underwriter has the final say.
Nevertheless, by obtaining a pre-approval, your chances of securing a loan are much higher, as the lender has all the factual details about your creditworthiness. A pre-qualification, on the other hand, might contain plenty of errors as the report is based on estimates (or guesswork). This makes it harder for a lender to determine your ability to meet the set conditions for a mortgage.
Homebuyers should always get pre-approved, not pre-qualified for a mortgage! By doing so they could save themselves a lot of time and possible heartache.
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Additional Real Estate Advice from Top Professionals
When obtaining a mortgage it’s imperative the applicant be honest on their mortgage application. If they don’t they could face consequences for lying on a mortgage application. Mortgage fraud is a federal crime, so applicants need to be truthful.
Are you a first-time homebuyer? If so you may qualify for one of the many first-time homebuyer programs.
A great loan program that veterans should explore is a VA loan. There are a few things to know about a VA loan, which any licensed and qualified lender will be able to discuss.
Applying for a mortgage doesn’t mean you’ll be approved for a mortgage. There are several reasons why a buyer will get denied for financing. However, just because one lender denies you doesn’t mean all of them will and if you truly don’t qualify you’ll know what you need to improve to get approved the next time around.
Don’t be afraid to ask your mortgage lender questions. Purchasing a home is the single biggest investment most people will make during their lifetime, so it’s important to know exactly what you’re getting in to.
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