Understanding Pre-Qualification vs. Pre-Approval
You’ve probably heard that you should pre-qualify or be pre-approved for a mortgage if you’re looking to buy a property. These are two key steps in the mortgage application process. ”Some people use these terms interchangeably, but there are differences that every homebuyer should understand,” says Margaret “Peggy” McLaughlin, a seasoned Broker Sales Associate at ERA Justin Realty. She breaks down the difference between the two.
The first step in obtaining a home loan is to meet with a lender and get pre-qualified. Pre-qualification can be done over the phone or online, and there’s usually no cost involved. Peggy says, “The pre-qualification process is based
on consumer-submitted data. The lender will review the buyer’s financial situation and discuss income, job stability, debt and credit.” Once the lender has performed a basic review of the qualifications and run credit, they will issue a Pre-Qualification Letter to the potential buyer, which will identify how much you can expect to borrow, the maximum sales price, any down payment requirements and basic terms of the loan, such as interest rate.
The Pre-Qualification Letter is used to provide evidence that the buyer has been reviewed by a lender who is vouching for their ability to obtain a loan. Your pre-qualified amount isn’t a sure thing, because it’s based only on the information you’ve provided. It’s just the amount for which you might b approved. A pre-qualified buyer doesn’t carry the same weight as a pre-approved buyer, who has been more thoroughly investigated.
Getting pre-approved is the next step, and it’s much more involved. You must complete an official mortgage application to be pre-approved, and you must supply the lender with all the necessary documentation, such as pay stubs,
bank statements, assets, etc., to perform an extensive check on your financial background and current credit rating. The lender can pre-approve you for a mortgage up to a specified amount after reviewing your finances.
At this point, you’ll also have a better idea of the interest rate you’ll be charged on the loan—and might even be able to lock it in--because this is often based in part on your credit score. You’ll receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. A Pre-Approval Letter is almost like shopping with cash; the only remaining piece of the puzzle is the property you are buying.
Call Peggy or any of the agents at ERA Justin Realty at 201-939-7500 to discuss your home buying questions today!!