When you’re in the market to buy a home, a lot of factors must be taken into consideration. Among them, financing may be the most important. How a new home is paid for matters for buyers and sellers. It’s important to know the difference between the pre-qualification and pre-approval steps for home mortgages.
The Main Difference Between Being Pre-Qualified and Pre-Approved
Simply stated, the difference between being pre-qualified and pre-approved for a mortgage comes down to paperwork.
Pre-approval requires more financial verification and, as a result, carries more weight with potential sellers. While becoming pre-qualified for a mortgage is an important first step to buying a home, it is just that — a first step.
Pre-qualification can help future homeowners understand the likelihood of qualifying for a mortgage and potential approval amounts. This is especially important for a first-time homebuyer.
Pre-approval requires digging deeper into finances and the plan to pay for a new home. This carries more weight in the bidding process, which makes it worth pursuing if you are serious about buying a home.
What Is Mortgage Pre-Qualification?
The first step when shopping for a mortgage is pre-qualification. This is a relatively simple process that can take place online, in person, or over the phone with a trusted lender.
During the pre-qualification process, a lender will ask questions about finances, such as income, assets, and debts. They will also conduct a credit inquiry. Most lenders will perform a what is known as a “soft” credit check at this phase, which does not have an impact on credit score.
After completing the pre-qualification process, the lender will go over potential mortgage options with clients.
Specifically, they will review how much money can be borrowed and the lowest interest rate available. Then, the lender will help estimate the monthly mortgage payment for the loan amount and rate.
These steps help potential homebuyers understand their budget options so they can determine how to make the cost work with their budget. This is an essential part of the process that has to happen before making any offers on a home to ensure buyers have a chance to carefully consider every financial aspect of buying a home.
What Is Mortgage Pre-Approval?
Once buyers have an idea of how much they can afford and have discussed different mortgage options with lenders, the next step is mortgage pre-approval. While the specific process for how to get approved for a mortgage varies among financial institutions, the basic idea is that the lender must verify all the financial elements that borrowers discussed with them in the pre-qualification stage.
This will require borrowers to provide lenders with official statements of income and assets, such as account statements, pay stubs, W-2s, and tax returns, as well as accounting for all debts, including credit cards, school loans, and car payments. They will also document other ongoing expenses, such as tuition or daycare payments, insurance, and cell phone bills.
After reviewing these documents, a lender will perform a hard credit check to obtain a full credit report from all three major agencies. They will use this information to confirm how much a buyer can afford and provide a formal mortgage pre-approval letter that is valid for 90 days. Buyers can present that letter to a seller’s agent along with a formal offer on a home.
This letter assures the seller that a buyer has access to the funds needed to complete the purchase. Many sellers will not even consider an offer without a preapproval letter attached.
Should You Get Pre-Qualified or Pre-Approved?
If you are serious about buying a home, getting pre-approved for a mortgage is a must. However, the best time to start the pre-approval process will depend on the timeline for the actual purchase. Because pre-approval letters are only valid for 90 days, buyers need to be sure that a purchase is imminent; otherwise, they will have to go through the entire pre-approval process again, including a hard credit check, which impacts their credit score.
Therefore, for buyers just starting a home search, getting pre-qualified for a mortgage is the perfect first step. Pre-qualification will allow first-time homebuyers to discuss payment and financial details with lenders to make sure they are ready to take the plunge.
Start the Homebuying Process with HRCCU
Regardless of which phase of the homebuying process you are in, the mortgage professionals at HRCCU are here to help. Contact us today to discuss the pre-qualification versus pre-approval process and begin (or continue) your homebuying journey with us.
