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What’s the Difference?
When buying a home, one of the first steps you’ll need to take is getting pre-qualified or pre-approved for a mortgage. But what’s the difference between these two terms? And which one should you pursue? In this article, we’ll break down the key differences between mortgage pre-qualification and pre-approval, so you can make an informed decision.
Mortgage Pre-Qualification
Mortgage pre-qualification is when a lender gives you an estimate of the amount of mortgage loan you may qualify for. This estimate is based on your reported income, assets, and credit score. It’s important to note that pre-qualification is not a guarantee of a loan, and the lender may require additional information or documentation before approving the loan.
The pre-qualification process typically involves a quick phone call or online application, during which you’ll provide basic information about your financial situation. Based on this information, the lender will estimate the loan amount you may qualify for. This estimate is not binding and is subject to change based on your credit score, debt-to-income ratio, and other factors.
Mortgage Pre-Approval
Mortgage pre-approval is a more in-depth process than pre-qualification. During pre-approval, the lender will review your credit report, income, and assets to determine the exact loan amount you’re eligible for. This process typically involves a more detailed application and documentation, including tax returns, pay stubs, and bank statements.
A pre-approval letter from a lender is a more significant commitment than pre-qualification. Once pre-approved, the lender has agreed to loan you a certain amount, subject to certain conditions, such as the property you purchase meets their underwriting guidelines.
Advantages of Pre-Approval
One of the biggest advantages of getting pre-approved is that it can give you more negotiating power when buying a home. If you’re pre-approved for a certain loan amount, you can use that letter as proof of your ability to secure financing when making an offer on a home. This can be especially useful in a competitive housing market, where sellers may be more likely to accept your offer if they know you’re already approved for a loan.
Another advantage of pre-approval is that it can save you time in the home-buying process. Once you’re pre-approved, you’ll have a better idea of how much you can afford to spend on a home, which can help you narrow down your search. Additionally, if you find a home you want to make an offer on, you’ll be able to move quickly, as the lender has already reviewed your financial information and approved you for a loan.
Disadvantages of Pre-Approval
One of the main disadvantages of pre-approval is that it can be time-consuming. You’ll need to provide detailed information about your income, assets, and credit history, and the lender will need to review this information before approving you for a loan.
Another potential disadvantage is that pre-approval may require you to pay for a credit check, which can be costly. Additionally, if you’re pre-approved for a loan, you’ll be locked into that lender’s terms and interest rate, at least for a certain period.
Which one should you choose?
Whether you get pre-qualified or pre-approved for a mortgage depends on your circumstances.
