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How is Pre-Qualified and Pre-Approved Different?

April 28, 2017 By JMcHood

How is Pre-Qualified and Pre-Approved Different?

There are so many definitions floating around the mortgage industry. As a new homebuyer, they can be rather intimidating. Pre-qualified and pre-approved both sound pretty official. But, one of these terms means much more than the other. Can you guess which one?

What’s the Difference?

There is a big difference between being pre-qualified and pre-approved. Pre-qualified means your qualifying factors were looked over quickly. You told the lender your estimated credit score, how much you make, and how much debt you have. The lender looks at these figures and decides you “might” get approved for a loan. They write you a pre-qualification letter stating you “might” be eligible for a loan of a specific size. That’s it. Did you notice what is missing here? You didn’t provide any proof of anything you told the lender.

A pre-approval, on the other hand, is not issued until you provide proof. The lender pulls your credit. They also look over your paystubs and W-2s. They have official documents showing what you make. They also know how much debt you have. Based on their findings, they determine that you are “pre-approved” for a loan. They write you a pre-approval letter based on these facts. The letter will still include conditions, such as an appraisal and clear title.

The pre-approval letter holds much more weight than the pre-qualification letter.

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Why Bother With a Pre-Qualification?

You might wonder what’s the point of getting pre-qualified? If it doesn’t hold any weight, why waste your time? But, it does have a purpose. It helps you know where you stand. A lender can look at your estimated credit score, income, and debt and know a lot. They can give you an estimate of how much home you could afford. Everyone needs to know this at some point. You need a place to start and this is it.

While the pre-qualification won’t get you very far with a seller, it does help you budget. You can then start tailoring your search for a home within the specified budget. The next step will be to get the pre-approval, but you shouldn’t do that until you are ready. Pre-approvals are rarely good for more than 90 days. You need to be good and ready to shop for and buy a home once you have the pre-approval.

Why Sellers Want a Pre-Approval

Sellers generally won’t accept anything but a pre-approval. This is because it’s official. No one wants to waste their time on buyers who don’t qualify. Sellers/realtors know that a pre-qual is just an estimate. No one can count on that letter. A pre-approval, though, they know is as good as an approval. What remains is the condition of the property. Whether it passes appraisal and has enough value has nothing to do with the buyer. Whether there are liens on the property have nothing to do with the buyer either. The pre-approval letter shows the seller the buyer is serious and able to buy. The rest is out of the buyer’s hands.

The Value of a Pre-Approval in a Bidding War

As the housing market gets better, bidding wars become common. Multiple buyers want a home. They start outbidding one another. Sometimes there are many bids and the seller must choose one. Often, sellers choose the buyer with the pre-approval. This shows the seller the buyer went through the initial steps with a lender. This means the buyer has a lender and can quickly get through the approval process.

If the seller chose a bidder without a pre-approval, they stand to lose. If the buyer can’t come up with financing within a specified period, the seller has to put the house on the market again. This wastes time and money. Sellers in a hurry to move will get frustrated. This is why sellers focus on buyers who already did the initial work with a lender. It provides more security for the lender.

Prepare Yourself for Both Cases

Whether you need a pre-qualification or pre-approval, prepare yourself beforehand. Look at your credit. Does it need improvement? If you have late payments or collections, fix them. Bring your accounts current. Talk to a lender about whether you should pay your collections. Sometimes you complicate matters when you pay old collections. Newer collections often need to be paid, though.

Look at your income. Is it stable? Have you been at your job for a few years? If it’s new, do you have training/education for the job? This will help lenders have faith in your ability to stay at the job. The more stable your income/employment, the better your chances for approval.

Lastly, look at your debts. Do you have a lot? Do they take up a majority of your income? Try to pay them down or off. Get rid of as many debts as you can. Don’t close revolving credit accounts, though. This could hurt your credit score. Keep them open, but with a zero balance if you can. This will help increase your credit score and decrease your debt ratio.

You can’t go wrong getting pre-qualified or pre-approved. But, when you are serious about buying a house, you need a pre-approval. Starting with a pre-qualification, though, can help you know where you stand. It gives you a chance to evaluate your financial situation and see what needs changes. This way when you do apply for a loan, you stand a better chance of getting approved.

Keep in mind, if you get a pre-qualification letter, it doesn’t mean much. It just means the lender took a quick look at you and thinks you are a good candidate. An underwriter still must look at your file and see where you stand. Today’s mortgage guidelines are much stricter than before. You may need to make some changes even after securing a pre-qualification. Don’t get discouraged, though. Keep shopping with different lenders. Every lender has different requirements. This is because each lender can handle a different level of risk. Figure out your risk level and find a lender willing to take it.

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Filed Under: USDA Loan Process Tagged With: home financing eligibility, loan approval, mortgage pre-approval, mortgage pre-qualification

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