What Does It Mean To Be Pre-Qualified For A Mortgage?
House hunting is exciting! So many possibilities -– the different houses, the neighborhoods, the potential family fun –- not to mention the color and style of the décor. Whether you've purchased several homes or if this is your first time, understanding the home-buying process is key to your success in getting the home you really want. One of the most vital steps in winning the house of your dreams is getting pre-qualified for a mortgage. With just a bit of organization and attention to detail, this step is an easy but vital part of the process.
First, what is pre-qualified? All it means is that you have obtained an estimate for the amount of money you can borrow for your mortgage based on your current financial situation and credit score. When searching for a house, create a budget that indicates how much you can afford to borrow. And be sure to keep your mortgage amount at a comfortable level. Bank of America cautions buyers about overly-large amounts, indicating that just because you might be able to obtain a large loan doesn't mean you should apply for it. It may be that a more modest loan is all you need for the house you want now.
Pre-qualified vs. Pre-Approved
While working to be pre-qualified and talking with people who lend money for a living, be aware of the additional designation of pre-approval. This is something slightly different and also slightly more complicated. Being pre-approved for a loan means filling out a mortgage application with a lending institution, a bank, or a mortgage company. The lender verifies financial information and runs a credit check but will also ask for specifics like pay stubs, bank statements, and tax statements, says Connexus Credit Union. The process is more exacting and daunting, but it results in a letter indicating you have the resources to purchase a house. Also, while the lender may give you a pre-approval letter, there's no guarantee you will receive a loan.
You can also obtain a letter from a lender regarding pre-qualification. But here's what to keep in mind, according to the US government's Consumer Financial Protection Bureau – some lenders use pre-qualified and pre-approved interchangeably, so be sure what you're applying for. Letters from lenders are good for 30 days, so you may want to get pre-qualified first, especially if you think there may be credit issues or other glitches you need to address before applying for a mortgage. Remember too that you're in charge of this purchase, and the lender you choose to work with is up to you –- getting a letter from a lender does not obligate you to use that particular lender.
Which is better?
So which way to go here? Is pre-approved better than pre-qualified? Not necessarily, since the two designations serve different purposes, as The Motley Fool points out. Pre-qualification is a great way to see how much money you might be able to borrow but is also a way to discover if there are any problems with your credit score or overall financial history. It's much better to find any issues before actually applying for a mortgage, so you can work on updating information and clearing impediments. If you're considering buying a house, getting pre-qualified as early in the process as possible is best. And almost everyone can get pre-qualified.
Pre-approval, on the other hand, is a much more stringent process — much more drilled down, with the lender investigating your financial details. For most people, a house is the largest purchase they will ever make, and lenders want to assess if you not only qualify but if you'll be a good borrower. Whenever market conditions favor the seller, buyers compete intensely for available inventory. Getting pre-qualified and making it known to the seller, most often through a realtor, is an excellent demonstration of your serious intent to buy and may give you an advantage over other offers.