“Give me six hours to chop down a tree and I will spend the first four sharpening the ax.”― Abraham Lincoln
If you’re thinking about buying a home, planning is the key to your success. One of the first things you can do is figure out exactly how much you can spend.* Since you probably don’t have a big stack of money sitting around, you’ll need to get a mortgage. You know you should get “pre-approved” or “pre-qualified” by a lender first. But which is it? The terms are often used interchangeably, but there’s a significant difference between being pre-approved and pre-qualified. If you’re buying a house, you need to know which is which.
The difference between being pre-approved and pre-qualified
What it means if you’re pre-qualified
Being pre-qualified means the lender has estimated how much you can borrow based on general information you provide on your overall financial situation. To get prequalified, you need to report your income and debts to the lender (some lenders look at your credit as well).
Pre-qualification is not a guarantee you can borrow the amount you prequalified for (it’s merely an estimate).
Even though it’s not a guarantee, there is value in getting prequalified, particularly if you’re unclear on how much you will be able to spend on a house. Let’s say you fill out a form online or speak to a lender on the phone. In return, they give you an estimate of what you might be able to borrow. This step of the process helps you know where you stand and opens the doors to further discussion with the lender. At this time you can review various loan programs, along with terms, interest rate, and down payment information.
That said, since pre-qualification is never a guarantee, you should always seek pre-approval before searching for a new home. Being pre-qualified does not carry the same weight as being pre-approved when it comes to making an offer on a home. Sellers will be more likely to choose a buyer with pre-approval. Read on to see why.
What it means if you’re pre-approved
Being pre-approved means the lender has confirmed your financial situation and has determined you are eligible for a specific loan amount. With pre-approval, the bank agrees to lend you an exact amount of money as long as your financial situation remains the same and the house you buy appraises* for what you agree to pay for it.
Pre-approval is more complex than pre-qualification. You will need to fill out a loan application form and provide the lender with documentation of your specific financial situation. Documents required include (but aren’t limited to) paystubs, bank statements, assets, and debt. The lender checks your credit score and history. All of this determines your loan program, interest rate, loan amount and any other stipulations of the loan.
Pre-approval confirms your ability to get a loan up to a certain amount. Therefore, when you make an offer on a house, sellers will know you can pay for it. They won’t have to wait to see if you can get the loan since you’ve already started the process. A pre-approval letter attached to your offer makes your offer stronger, particularly in a competitive market.
Pre-approval is more valuable when it comes to actually purchasing a home. While pre-qualification can help you get the process started, pre-approval will seal the deal.
*An appraisal is the estimate of the current market value of a home, performed by a professional appraiser before the closing on the sale of a home. Mortgage lenders require an appraisal.
Whether you’re selling or buying a home, the process can feel intimidating and overwhelming. But it doesn’t have to. At Coluzzi Real Estate, we answer all your questions and simplify the process. We’re there for you every step of the way. Please don’t hesitate to contact us today!
Note: I believe you should sit down and figure out how much you can realistically afford to spend before you even speak to a lender. Only you can know if you can positively afford something, though you will have to do your homework to figure it out. To do this, determine your current spending and figure in how a new mortgage payment will fit. While lenders do consider your income and debts when deciding how much to lend you, they do not take your other expenses into consideration. Figure everything into your monthly spending, including food, gas, school expenses, insurance, etc. to get a better idea of where you stand.