Pre-approval vs. Pre-qualified
Buying a home can be a time of both anxiety and excitement. Home buyers that know about the terminology associated with home ownership have a better chance of fending off some of that anxiety. Pre-approval and pre-qualification are two of the most confusing terms when buying a home. Knowing the difference between pre-approval vs. pre-qualified allows buyers to understand what their agreement with the financial institution is, as well as what kind of house they can afford.
Pre-qualification
This step simply involves looking at the buyer's finances and estimating how much they can afford to spend on a house. Items like income, assets, down payment, and debts are taken into consideration. There is no commitment involved with a pre-qualification. The buyers are not obligated to purchase a home, and the financial institution is not obligated to give the buyers a loan. Pre-qualification does not include an in-depth look at the buyer's finances or an evaluation of their credit report. It simply lets the buyers know if home ownership is an option and the range of prices they can look at. Pre-qualification is a relatively short process and there is usually no cost to the buyer.
Pre-approval
When trying to look ahead at your loan options, pre-approval takes pre-qualification a step further. In this step, the lender does an extensive evaluation of the buyer's financial history, including their credit report. Instead of just telling the lender what their income, assets, and debts are, buyers are required to provide some documentation. Payroll records, bank statements, and other records are often required to proceed with a pre-approval. A pre-approval usually includes an application fee and is a tentative agreement from a lender stating that the buyer will be given mortgage financing. It is important to understand that a pre-approval is not a mortgage guarantee. A mortgage application is only guaranteed after a title search, appraisal, and other financial verifications are established. Since the pre-approval already takes many financial situations into consideration, the pre-approval status is very attractive to sellers. In situations where multiple offers are presented, buyers with pre-approval will often get selected over buyers that haven't established financing.
There are advantages to completing both of these steps, and it is important to remember that buyers always have the option of choosing a different lender. Just because one lender performed a pre-qualification does not mean that the buyer has to continue with that lender for the pre-approval and mortgage. Shopping around sometimes reveals better interest rates or a lender that better represents the buyer's wishes and communication style.
It is also important to note that the terms pre-approval and pre-qualification sometimes get interchanged by either lenders or other real estate professionals. Knowing the difference between pre-approval vs. pre-qualified can help buyers take control of their home ownership situation.
