Pre-Qualified vs. Pre-Approved: The Basics for First-Timers
The process of buying a home does not begin with looking at properties for sale. In fact, the first step in home buying is to determine whether or not you are capable of securing financing for your home purchase. While the terms “pre-qualification” and “pre-approval” have been interchangeably used by most people, they do not necessarily mean the same thing. This article is a guide for first-time home buyers who are taking their first steps in buying a home. It explains the difference between getting pre-qualified and getting pre-approved, as well as how having one (or both) can help you buy your first home.
Fact 1: Getting pre-qualified does not guarantee that you will be approved for a home loan.
Getting pre-qualified is the first step in the mortgage process. No fees are involved when a bank or lender evaluates your debt, income, and assets to determine a mortgage amount you will be qualified for. The process is free and can be done over the web or via phone. It is a quick procedure with calculations based only on information you provide to the lender. Thus, the pre-qualified amount is only a gross estimate of what you can actually afford for a home loan. Lastly, even the pre-qualified amount may differ from the actual, pre-approved amount you may get because pre-qualification does NOT include an analysis of your credit report and CANNOT determine your ability to purchase a home.
So why bother getting pre-qualified? This step may not guarantee financing for your home purchase, but knowing what you can afford can help you and your bank/lender discuss investment goals and mortgage concerns. You will also be guided by looking into homes that are only within your price range.
Fact 2: Home sellers take pre-approved home buyers more seriously.
Getting pre-approved is the second and more crucial step. You also have to be more involved. You need to complete an official mortgage application and pay an application fee. You have to provide necessary documentation to the lender so they can perform an extensive check on your financial background and current credit rating. The findings of the lender after this investigation will determine the specific mortgage amount for which you will be approved. Details about interest rates may also be provided.
Getting pre-approved means you will have a conditional commitment in writing for a certain loan amount; this, in turn, will help you look for a home that costs equal or lower the pre-approved amount indicated. This is advantageous to you as a buyer because sellers will prefer to transact with you, knowing that you are highly likely to obtain an actual mortgage due to your pre-approval.
Fact 3: Home buyers should purchase a home that is 10-20% lesser than their pre-approved loan amount.
Pre-approval and pre-qualification are different. Getting pre-qualified helps you determine how much you can afford in buying a home. Getting pre-approved determines how much you are able to secure for financing based on your financial capacity and current credit rating. We highly recommend that you get both before starting your home search!