A Pre-Qualification Is Not a Pre-Approval

A Pre-Qualification Is Not a Pre-Approval (Source: pixabay.com - used as royalty free image)

Getting pre-approval for a mortgage loan is one of the most important steps you’ll take in the home buying process.

As we’ve written about before, getting pre-approved is one of the essential steps toward making a successful offer; having pre-approval papers in hand will allow you to act quickly when you find that dream home, and getting pre-approved typically communicates to the seller that you’re able and ready to buy without too many strings attached, encouraging them to accept your offer.

And even before you see that perfect property, getting pre-approved will allow you and your real estate team to conduct your home search more efficiently and confidently, as you’ll be able to narrow your focus to homes that are comfortably within your reach.

So, now that we’ve covered some of the reasons why getting pre-approved is so important, it’s important that you understand what getting pre-approved actually means. And there’s one important point we need to make clear before we go any further: A pre-qualification is not the same as a pre-approval.

We’ve seen this issue trip up too many would-be homebuyers before to let it go undiscussed. In order to understand why getting a pre-approval is so vital, let’s first break down the differences between pre-approvals and pre-qualifications:

What Does It Mean to Get Pre-Qualified?

Pre-qualification is a fairly easy process – so easy, in fact, that it can be done online and as fast as a... well... rocket, usually at no cost. The process is pretty straightforward: it entails you informing a bank or lender with a broad financial picture, including debts, income and assets - but not documented evidence. Once you’ve given this information, the lending company will evaluate it, and come back to you with an idea or estimate of the mortgage amount you should be able to qualify for.

Because it seems so easy, many prospective homebuyers jump to get pre-qualified, but it’s extremely important to realize that getting pre-qualified for a mortgage may not help one meet their end goal. In fact, many listing agents will look at a pre-qualification and say "I can't use this, I need a real pre-approval."

Why? Well, a pre-qualification does not include a thorough analysis of your credit report, or provide the in-depth insight into your finances that is necessary to have confidence you'll get a mortgage commitment. While it may allow you to plan ahead or begin the discussion about your mortgage needs, the amount of your pre-qualification is just a guide post, and is not written in stone – by definition, it helps you manage your expectations, rather than act in reality. That said, a pre-approval doesn't take much longer, and gives you much more reliable information.

What Does It Mean to Get Pre-Approved?

A pre-approval is a more in-depth process, one that will actually move you forward in terms of the mortgage process and make it easier to purchase a home.

You see, in order to secure a pre-approval, you’ll need to, in essence, complete an official mortgage application (which may include a fee, be sure to ask), allowing your lender to perform a much more exhaustive look into your financial history and credit rating, beyond what you self-report.

From this research, the lender will be able to give you a much more exact idea of the terms for which you can be approved. With a written home purchase contract, they'll even be able to help you understand and lock into a specific interest rate. All of this means that you will be able to walk away from your lender with a written commitment for an exact amount; a pre-qualification, on the other hand, is just a benchmark, and doesn’t provide any sort of conditional arrangement with a lender.

Once you’re pre-approved, you’ll be able to look for houses knowing well in advance how much you’ll be able to afford, saving you plenty of time and stress along the way. Similarly, when you are ready to make an offer, you’ll be able to show to the seller that you’re ready to buy (in that you’re in a much better place to get a loan commitment), and that your offer isn't likely to fall apart due to financial "surprises" (which can be a time-consuming turn-off to eager sellers). We've seen it happen more than once.

Have any more questions about the mortgage process? We’d love to put you in contact with a qualified lender here in Chicagoland. Looking to begin the search for your new home and not sure where to start? That’s where we come in! Drop us a line today!

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