What Are Pre-approval and Pre-qualification?
Want to make a good first impression when you're shopping for a home? Two types of documents can help you do that: Mortgage pre-approval and mortgage pre-qualification.
Each one provides sellers and lenders with important information about your financial situation -- namely, how much you can afford to borrow and what you can afford to pay each month on a mortgage. These documents help them better guide you through the home-buying process.
Here is a quick overview of the two processes so you can decide which one you should get.
Pre-approvalA pre-approval involves the same steps as a complete mortgage application and is therefore a very thorough review of your ability to buy a home. Because of this, buyers obtain pre-approvals to demonstrate to sellers that they can afford the home and are serious home buyers.
How to get pre-approved: To get a pre-approval, you'll basically need to go through the entire mortgage application process, including income and employment verification, as well as a credit check. The only major difference between a pre-approval and a completed mortgage application is that with a pre-approval, you haven't decided on a particular property yet.
Upon obtaining a pre-approval, you'll receive a letter stating that the bank is prepared to give you a loan for a certain amount. In addition to assuring you that credit and income won't be an issue later on, a pre-approval lets sellers know that you're a serious buyer and won't just make an offer and disappear.
Benefits of pre-approval:
- You'll know exactly what you can afford.
- It eliminates surprises after you choose a home.
- Sellers will take your offers more seriously.
Pre-qualificationA pre-qualification is a less thorough process during which a lender will examine a prospective borrower's income and expenses in order to determine how much they could potentially borrow to buy a home. Usually, a pre-qualification is based on information obtained verbally (not verified) from a borrower, and it may or may not include a credit check.
Getting pre-qualified: Usually, a pre-qualification can be done online or in a few minutes by visiting a lender in person. It's not a very thorough process, and little or no documentation is necessary.
Benefits of pre-qualification:
- Tells you how much house you can afford.
- Helps you determine your budget.
Drawbacks:
- The information in a pre-qualification is unverified, so it carries little weight with sellers.
- It's not a guarantee of your ability to obtain a loan.
The bottom lineIf you want to be considered a serious buyer, pre-approval is almost always the way to go. Not only does it help during the shopping process, but it can also save time when you're trying to close on a home, as a lot of the application (credit check, income verification, etc.) will be complete already.
The article What Are Pre-approval and Pre-qualification? originally appeared on Fool.com.
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