Whether you’ve found your dream home already or you’re just starting to look at houses, you’ve likely heard some real estate terms you’re not familiar with. First, there are words like contingent and escrow, which you probably don’t often hear in casual conversation. Then there are the many real estate acronyms that seem impossible to keep track of, like FHA, USDA, MLS, ARM, etc. And then there are some words that sound so similar that they’re easy to mix up, like pre-qualification and pre-approval. Let’s focus on those last two: what exactly is pre-qualification vs pre-approval? Are they the same thing, and if not, which one is right for you? Here’s what you need to know about pre-qualification vs pre-approval as you start the home buying process.
If you’ve heard you should look into getting pre-qualified for a loan, that means you should contact your lender and provide some general financial information. If you’re wondering where to begin here, you’re not alone. Financial information could mean a lot of things! But in this case, it includes your annual salary, your monthly expenses, the amount in your savings account, and an idea of your credit score. So, basically, anything you’ve been told to keep private and never tell anyone is exactly what you’re going to need to tell your lender if you want to pre-qualify for a loan. This is why it’s so important to pick a lender you can trust, as you’re going to be sharing a lot of personal information in the next few months!
So, why do you have to share this kind of information with lenders? It can help them give you an idea of how much you might qualify for in a home loan, which is helpful since you can start looking for houses that cost less than the amount you pre-qualified for. You’ll even get a pre-qualification letter that you can show sellers and real estate agents if you want to stand out from buyers who haven’t gotten pre-qualified yet. This letter shows that you’re serious about buying a home since you’ve already talked to lenders. It also shows you’re likely to be able to afford the house—assuming it’s going for less than the amount you qualify for!
Keep in mind that pre-qualification doesn’t require your lender to verify any of your financial information. This process relies on self-reported information. If it turns out you embellished or were wrong about your income, credit score, or expenses, you won’t qualify for the loan amount that your pre-qualification letter lists. This is why it’s important to be honest and accurate when getting pre-qualified for a loan—and to also realize it’s an estimate, not a guarantee. So resist the urge to brag to your bank about your self-perceived millionaire status. There’s a time and a place for that, and this isn’t it!
To understand the nuances of pre-qualification vs pre-approval, you now need to get an idea of what pre-approval is and how it differs. Basically, it’s one step further than pre-qualification, because the lender must verify your financial information before giving you a pre-approval letter.
So instead of you telling the lender what your salary is, they’ll request pay stubs from you to prove it. Rather than simply stating what’s in your savings account, the lender will look at your bank statements. And instead of you self-reporting your credit score, the lender will check your credit and let you know what it actually is. So there’s no embellishing your financial information once you get to this step!
Once you make it through the verification process, you’ll get a letter stating you’re pre-approved. As you might imagine, this letter gives you a little more power in the home buying process, even more than you’d get with a pre-qualification letter. Essentially, the pre-qualification letter is you claiming that you can afford a certain amount. The pre-approval letter is the bank backing you up and making your claim look more legitimate!
Both options have their own benefits. Let’s start with the advantages of pre-qualification. The main benefit here is that since there’s no verification required from your bank, you can get pre-qualified quickly—typically within minutes. You can even do this step online. And in most cases, the lender won’t check your credit, which means you won’t have any credit inquiries on your report that could affect your score.
Of course, pre-approval comes with its own advantages. The main one is that since your lender verifies all your financial information, you’ll have a more accurate picture of what you can afford. You’ll likely even get an estimate of the interest rate you’ll qualify for. Then there’s the fact that pre-approval letters carry more weight than pre-qualification letters in the home buying process. So in a competitive market, your pre-approval should put you closer to getting the house you want, as you’ll look like less of a risk to the seller than other buyers do.
Now that you know the differences between pre-qualification vs pre-approval, which one should you pursue? In general, the right one depends on where you are in the house-hunting process. If you’re just getting started, getting pre-qualified can give you an idea of the amount of mortgage you might qualify for so you know your ideal price range.
This is good to know before you start looking at houses so you don’t fall in love with that $1 million house when you qualify for $500,000 or less. By the same token, you might find that you can afford more than you thought! That may mean you can stop looking at starter homes and fixer-uppers and set your sights on larger or newer homes that better suit your needs. Either way, it’s nice to know that your lender believes you can actually afford the homes you’re looking at.
On the other hand, if you’ve already started looking at houses and have narrowed down your favorites to a few, it’s a good idea to skip pre-qualification and go right to pre-approval. Sure, it will take a little longer—usually about 10 days—due to the verification process. Also, you’ll likely get an inquiry on your credit report due to the credit check. But having a pre-approval letter in hand will get the attention of sellers, giving you the ultimate advantage as you look at homes.
Another reason it’s best to wait to get pre-approved until after you’ve started looking at houses is that pre-approval can expire. It’s usually good for 30 to 90 days, depending on the lender—so don’t take this step too early in the house-hunting process! Basically, if you’re just getting started—and if you’re a first-time home buyer—pre-qualification may be the best first step for you. As you get closer to finding your dream home and making an offer, seeking pre-approval is a good idea.
Your real estate agent can also help you decide between pre-qualification vs pre-approval. If you don’t yet have one, come to LemonBrew for help getting matched with a Partner Agent you can trust during the buying process. And if you’re ready to get a mortgage loan, contact LemonBrew Lending today to start your application!