Before you look at homes, you should know how much you can afford. You might have an idea in mind, but the mortgage lender has the final say in how much you can afford. If you can’t qualify for mortgage financing, for example, you won’t be able to afford the home.
When you apply for a mortgage, you’ll have two options. Understanding the differences between getting pre-qualified vs. pre-approved is important. Here’s what you should know.
What is Pre-Qualification?
Think of a pre-qualification as a verbal estimate of what you can afford. There’s nothing binding about it. Even if a lender writes a pre-qualification letter, it doesn’t hold any water because it’s an estimate of what you can afford.
To get pre-qualified, lenders ask you questions about the following:
What’s your estimated credit score?
How much do you make per month?
What are your estimated monthly debts?
Lenders use this information to determine how much loan you can borrow. There’s nothing concrete about their findings because they don’t look at actual data – they just take your word regarding your qualifications.
When is Pre-Qualification Helpful?
If you’re in the planning stages of buying a home and figuring everything out, a pre-qualification can be helpful.
You can even give your pre-qualification letter to your real estate agent to give him/her an idea of what you can afford. This will help them to narrow down your options to avoid wasting your time looking at homes that are absolutely out of your price range.
What is a Pre-Approval?
A pre-approval is the first step in the underwriting process. It’s best when you’re serious about buying a home and need proof that you’re approved to do so.
A pre-approval is an evaluation of your personal qualifying factors. To get pre-approved, you must not only tell lenders your income, assets, and liabilities but provide proof of all of it.
After you complete a mortgage application, they’ll pull your credit. This is the first step to determining if you qualify for a mortgage. If your credit score falls within the parameters of their loan programs, they’ll ask for the following documents:
Paystubs covering the last 30 days (4 if paid weekly, 2 if paid bi-weekly, and 1 if paid monthly)
W-2s for the last 2 years from all jobs
Tax returns for the last 2 years if you’re self-employed or work on commission
Asset statements for the last 2 months
Current credit card and loan statements
Proof of employment
Lenders use this information to pre-approve you for a loan. If your qualifying factors meet their requirements, they’ll write a pre-approval letter. In the letter, it will state the following:
The loan program you qualify for
The amount of down payment required (and verified)
The loan’s interest rate
When the pre-approval expires
Pre-approval letters also include any conditions you must satisfy to clear the loan to close. The pre-approval process only evaluates your qualifying factors, not the home’s factors, so it is bound to have the home appraisal and home’s title work as a condition. There may also be other conditions the lender needs to clear before the final approval of your loan.
To determine if you qualify for pre-approval, visit https://www.loanfactory.com/apply and complete the submission form.
When is a Pre-Approval Helpful?
When looking at pre-qualification vs. pre-approval, you should always choose pre-approval when you’re ready to look at homes.
Most sellers today won’t even show their homes to buyers that aren’t pre-approved. With the low inventory on the market, sellers can be picky about who they let into their homes. They aren’t going to waste their time on buyers that aren’t pre-approved yet because there’s no guarantee that you can afford the home.
Pre-approvals last for 60 – 90 days, so you have time to find the right home. If your pre-approval expires before you find a home, you can renew it by updating your documents with the lender and getting a new letter.
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Why Consider a Pre-Qualification or Pre-Approval?
Before you buy a home or even think about buying it, it’s important to know what you can afford and to ensure that lenders feel the same.
Just because you think you can fit a $1,200 payment into your budget doesn’t mean the lenders will agree. They look at data to ensure that your debt-to-income ratio is low enough for you to be able to afford all your obligations.
They also look at the longevity of your employment and income, your assets, and your credit history to make sure you have a good record of paying your bills on time.
If you’re just in the planning stages, a pre-qualification may be good enough, but when you’re ready to buy a home, it’s vital that you get pre-approved to ensure a lender will approve you for the loan amount you need.
How to Increase your Chances of Approval
To get pre-approved, you must prove to lenders that you can afford the loan you’re requesting. Here’s the best way:
Improve your credit score as much as possible – The higher your credit score is, the more likely you are to get approved
Keep your debts low – The fewer debts you have, the more room you have for a mortgage payment and mortgage approval
Keep your income steady – Try having a steady employment and income history when you apply for a mortgage; 2 years is best
When you’re choosing between pre-qualification vs. pre-approval, think about your goals. How soon will you buy a house? Are you just trying to see how much you can afford or are you ready to look at homes and make an offer?
Either way, prepare your finances as much as possible and work with a lender to determine what type of loan you can get. The key is to find a mortgage with the most attractive term and the lowest rates to keep the overall costs of buying a home as low as possible.