If you’re considering buying a home, it’s important to familiarize yourself with key terms and understand the difference between “pre-approval” and “pre-qualification”, two terms buyers will encounter early on. While they sound similar, they have distinct meanings and implications. We break down the differences to help you make informed decisions on your home buying journey.
Pre-Qualified:
When you're pre-qualified for a mortgage, it means a lender has assessed your financial situation based on information you've provided. This usually includes your income, assets, debts, and credit score. Pre-qualification gives you a rough estimate of how much you might be able to borrow. It's a relatively quick and informal process, often done online or over the phone.
However, being pre-qualified doesn't guarantee you a loan. The information provided hasn't been verified, so it's more of an initial assessment rather than a firm commitment from the lender. While pre-qualification can give you a ballpark figure to work with when house hunting, it's essential to follow up with pre-approval for a more accurate picture of your borrowing power.
Pre-Approved:
Pre-approval involves a more thorough examination of your finances by the lender. You'll need to submit documentation such as pay stubs, bank statements, and tax returns to verify your income, assets, and debts. The lender will also check your credit report. Based on this information, the lender will offer you a specific loan amount and interest rate, valid for a certain period, typically 60 to 90 days.
Being pre-approved carries more weight than being pre-qualified because it shows sellers that you're a serious and capable buyer. It demonstrates that a lender has already conducted a detailed review of your financial situation and is willing to lend you a specific amount of money. Having a pre-approval letter can give you a competitive edge in a competitive housing market, as sellers are more likely to consider your offer seriously.
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Published May 2024
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Sources:
https://fred.stlouisfed.org/series/MORTGAGE30US