A mortgage prequalification is an estimate of how much you can afford to spend on your home in conjunction with how much money a lender might be willing to give you. A mortgage pre-approval by a bank or mortgage broker means that you have a vague commitment from a specific mortgage lender for future funding.
What Does It All Mean?
Buying a home can be stressful, in large part because trying to understand all of the vocabulary and various terms associated with the process can be confusing. In many instances, terms are easily confused with each other, which can lead to problems for homebuyers, especially in competitive markets. One example of this is pre-qualification vs. pre-approval, which are two entirely different things. Even loan officers and real estate agents occasionally get the terms confused, so it definitely pays to know the difference. Read on to learn more about the difference between pre-qualification and pre-approval when it comes to the mortgage process.
Mortgage Loan Pre-Qualification
A mortgage loan pre-qualification is essentially an estimate of how much you can afford to spend on your future home in conjunction with how much money a lender would be willing to give you. The pre-qualification process is much simpler than that of a pre-approval, and because of this, it is often suggested to obtain one before you even start looking for a home.
The best way to get pre-qualified is to consult with a lender regarding your assets, income, and down payment bracket. There is typically no cost or commitment to this type of meeting. This is a great option for people who are not sure about purchasing a home, but would still like to see what they could potentially qualify for if they decided to do so.
Pre-qualification is a helpful first step in the home buying process, but it does not guarantee a loan. For this reason, pre-approval is a more thorough way to ensure you are as competitive as you can possibly be when you start house hunting.
Pre-Approval for a Home Loan
If you are pre-approved by a bank or mortgage broker, this means that you have a vague commitment from a specific mortgage lender for future funding. With a pre-approval letter, you supply the mortgage lender with physical documentation of your income, your assets, and your debts. Your bank will typically run a credit check in order to verify all of your employment and financial information, which may include a fee. Once your bank has approved your finances, you will receive a letter of commitment from your lender, stating the amount of money that their bank will loan to you for the purchase of your home. Once you have this pre-approval, you can start shopping around for a home. Real estate agents and sellers tend to take pre-approval more seriously than pre-qualification.
Pre-Approval: Not a Guarantee
A pre-approval is not, under any circumstances, a firm guarantee that you will receive a mortgage loan, though it is likely. Other verifications, such as a title search and property appraisal, are necessary before you will receive your loan. The pre-approval is also a non-binding agreement and you are free to seek a different lender for your loan, but the application process tends to be more efficient if you stick with the same company that pre-approved you.
Ultimately, pre-qualification and pre-approval are helping steps when beginning your home search, but pre-approval packs more of a punch in terms of credibility. Regardless, these terms are useful and important to know when first researching and starting the process of buying your own home.
Looking to finance your home? Check out our step-by-step guide here!