People in the market for a home often ask about the meaning of the terms “pre-approved” and “pre-qualified,” when it comes to mortgages. It’s a smart question to ask, because the two terms have quite different definitions. Let’s take a look at what Investopedia has to say about the technical details of this all-important issue for home shoppers:
- The first step in the financing process is pre-qualification, which give you a pretty good idea of how much you’ll likely be able to spend on your house purchase. Most people do their prequalification over the telephone or even online.
- Pre-qualification entails you speaking informally with your bank and telling them about your income, amount of savings, and your overall creditworthiness. You provide the information and the bank tells you the amount they think you’ll be able to borrow.
- Pre-approval is a more involved process. You’ll fill out a mortgage application, pay a fee, submit various financial documents and authorize the bank to check your credit rating.
- The good news about pre-approval: Your lender will usually give you a specific amount for which you are approved, and will often let you lock in an interest rate, even before you have selected a property! That way, you go into the house-hunting phase of the search knowing what you can (and can’t) afford. Most of the grunt work is over now, and you can get down to the actual “hunt,” which most people enjoy.
- The final step is called a “loan commitment,” which happens after the property is chosen, passes muster with the lender, and all the other details are ironed out. (Loan commitments are actually a much larger topic which we will deal with in a future blog post).
The bottom line: Get pre-qualified first, then aim for pre-approval when you are ready to submit documentation and your credit score is where you want it to be.
Shopping for a home should never be a “random” process. By doing your homework and due diligence, you will embark on the adventure of home ownership with confidence and excitement. Let’s face it, it’s fun to buy a house!