Mortgage Pre-Qualification vs. Pre-Approval

When applying for a mortgage, the adage about dotting your “i”s and crossing your “t”s certainly applies. It’s not just about knowing what features you want, right down to the attached two-car garage and the stainless-steel appliances. It’s also about following all the application procedures to be sure you can afford everything you’re looking for in your home. That includes going through pre-qualification and pre-approval. This is especially important for first-time homebuyers. The two aren’t interchangeable, unfortunately. A pre-qualification is the initial step and it isn’t as complete as pre-approval. But it does give borrowers an idea of how much home they can afford. Pre-qualification can be done through a bank or mortgage lender. Borrowers will provide estimates of income, debt as it relates to income (debt-to-income ratio), and estimated credit score. Borrowers can pull their own credit score through a variety of free sites.

As we stated earlier, pre-qualification is a good first step, especially for first-time homebuyers so they know what they would likely qualify for. However, it often doesn’t carry much weight for real estate agents or home sellers. They want to be more confident in potential buyers before going through the trouble of showing their properties.

That is where pre-approval comes in. This is a more formal process where borrowers’ credit scores are formally reviewed, as are financial statements. Pre-approval is an actual document from a lending institution that says a borrower is pre-approved for financing.

Pre-approval comes after a borrower fills out a formal loan application. Besides formally reviewing a credit report, such an application will ask for verified income, such as pay stubs, verified employment documents, and tax returns. Also part of the process is underwriting a loan according to mortgage rates at the time of the application.

Lenders use this information to determine debt-to-income ratio. And that ratio determines what a borrower can afford. Pre-approval often sets real estate agents and home sellers at ease and affirms for them they aren’t necessarily wasting their time on what a buyer can afford based on mere estimates generated by pre-qualification.

Pre-approvals are generally good for up to 90 days. But borrowers need to keep in mind that there are certain things that can transpire in that time that can affect ultimate approval. Lenders often recommend that borrowers not buy any big-ticket items (a car, furniture set, etc.) that could significantly affect debt-to-income ratio.

Better Lending is committed to guiding borrowers through the mortgage loan process with as little stress as possible. When you are ready to talk with one of our experienced loan advisors, call us at 888-400-1373.