If you’re considering buying a home, it’s essential that you know the lingo, especially as there are so many terms that appear similar but actually mean very different things. When researching mortgage options, you’re likely to hear about pre-qualified mortgages and pre-approved mortgages. While they sound the same – indeed many people use the terms interchangeably these days – they are drastically different things.
Mistaking the two could have disastrous, expensive or even legal consequences in the worst-case scenario. Fortunately, once you know the difference it’s easy to avoid dangerous pitfalls, allowing you to shop happily for your dream home. So, let’s take a look.
What Does it Mean to be Pre-Qualified?
Getting pre-qualified for a mortgage is generally considered the first step on the road to buying a home. It gives you an idea of what you can afford and is a great help in sifting through your options. In order to get pre-qualified, you need only give basic information about your financial situation to a lender. This can be done for free either in person, over the phone or even online.
You’ll typically discuss your income, assets and any debt, but won’t be required to submit a credit report. Using this information, the lender will make a basic evaluation and give an approximation of what kind of mortgage you can afford. Bear in mind, the lender will not commit to lending you money at this point and is merely providing an estimate.
Getting pre-qualified provides a good opportunity to meet with numerous mortgage lenders and talk about your financial goals. You can get a good feel for the service they offer and discuss a variety of potential options for going forward. It also provides you with a ballpark figure to base your budget on, enabling you to filter out those houses that fall outside your upper limit.
What Does it Mean to be Pre-Approved?
When you know that you’re serious about buying a home, it’s well worth getting pre-approved for a mortgage. This is the next step and it involves the lender carrying out a far deeper analysis of your financial situation and checking your credit report. You’ll be required to fill out an official mortgage application and you’ll typically need to pay a fee.
Once they’ve carried out their checks on your financial background, the lender will detail the specific mortgage amount you qualify for. Pre-approval provides a far more solid figure than the pre-qualification estimates and enables you to carry out more accurate searches within your budget. The lender will then issue a written conditional commitment for an exact loan amount.
Which is Best for You and When?
In general, a pre-approved mortgage carries a lot more weight than a pre-qualification. Being pre-approved shows sellers that you’re serious about making an offer and makes you a more attractive candidate than a buyer who is only pre-qualified. This is because it shows you have already been approved for the financing you require to buy the house and that the deal can be completed more quickly.
That’s not to say the pre-qualification is without its merits. Getting pre-qualified enables you to speak with numerous lenders without risking your credit rating. Each time your credit report is reviewed, outside of a 2-week period, your score will incur penalties. By becoming pre-qualified, you can take your time as you shop around for the lender that suits you.
If you’re only thinking about buying a home, getting pre-qualified is the best option as it will provide an idea of what you can afford. When you take the leap from just browsing to actually buying, you will need to become pre-approved. As a pre-approved mortgage is a conditional commitment from the lender, you know exactly what you can afford and don’t risk losing your dream home or making an offer you can’t actually afford. Assuming all the conditions are met, your lender will provide the required loan.
In the fast-paced world of modern real estate, being ahead of the competition is essential, so as soon as you know you’re serious about buying a new house, get pre-approved. And remember, being pre-qualified is no guarantee of financing, so don’t make an offer without a pre-approved mortgage!