Many inexperienced prospective homebuyers mistakenly believe that because they’ve been pre-qualified for a mortgage, they are automatically pre-approved for a home mortgage. In reality, these two similar-sounding terms are quite differently defined. If you’ve been tagged with the “pre-qualified” label, learn exactly what it means before you get too excited; and find out what you need to get that coveted pre-approved status that will better position you for homeownership.
Basically, this term refers to an unofficial estimation of the type of house you can afford. To reach this figure, a loan officer will review your credit history, finances and submission of income. Lenders will figure your debt-to-income ratio and create a letter of pre-qualification detailing how much they feel you should be allowed to borrow; however, at this point, they will not access your credit report. Though it’s free, because it’s based on vague numbers and information, pre-qualification doesn’t equip you with any form of substantial credibility with sellers or lenders. What it does do is provide you with a general notion of what you can actually afford.
Unlike pre-qualification, pre-approval actually holds a lot of weight in the real estate and mortgage industry. To gain this label, you’ll have to meet with a lender and present business licenses, bank statements, tax returns and other forms of documentation. During this process, lenders will review each piece of information, access your credit report and verify your employment. If all goes as planned, the lender will craft a pre-approval letter certifying that you indeed have the financial resources to purchase a home of a certain value. Generally, the letter will also specify the approximate interest rate you will need to pay for such a loan. If you have pre-approval, you’re in a great position for success, as you’ll be equipped to prove to sellers that you possess the financial backing to pay their asking price.