Obtain pre-qualification or pre-approval for Mortgage loan They can be two important steps when you want to buy a home. You'll find out the approximate amount you can borrow, giving you the maximum budget for your purchase. You can get a letter from the lender stating that you have been conditionally approved for a loan, which may be important when making an offer in a competitive market. You will also understand the scope of Interest rates Available for you.
Read on and we'll explain what these two similar terms mean to potential homebuyers.
Learn more: How to buy a house, step by step guide.
Prequalification vs. Preapproval: Key Differences for Home Buyers
Understanding the differences between mortgage prequalification and pre-approval can be confusing because some lenders do not use the terms in a consistent manner. But the most important thing to remember is that there are two ways to get an estimate from a lender.
We'll define mortgage pre-qualification as the simpler process and mortgage pre-approval as the most complex, as this is consistent with what many lenders use.
- Mortgage prequalification (less complex): One process asks you to estimate some basic information, such as your income, debts, and finances Credit score. Within a few seconds or minutes, you'll be able to see how much you might be able to borrow based on what you've shared.
- Mortgage pre-approval (more complex): There is also a process that may require you to complete an application, submit copies of documents, and give the lender permission Check your credit. It may take a few hours or days to get results, but your lender can show you the maximum loan amount and estimated terms more accurately based on current mortgage rates.
Some lenders distinguish between the two by calling the more complicated process a verified approval. However, back to further potential confusion, they may call the simpler process either pre-qualification or pre-approval.
Here are some things you should be aware of when seeking to get pre-qualified or pre-approved for a mortgage, based on how we explained the terms above.
| Prequalification | Prior approval |
| Estimate how much you can borrow based on self-reported information. | Estimated loan amounts and terms based on verified documentation. |
| They may include credit checks that lead to simple inquiries. | This may result in credit checks and hard inquiries on all three of your credit reports. |
| It can be a good place to start when you're thinking about buying a home for the first time. | Useful before going to open houses and make offers. |
When is pre-qualification versus pre-approval obtained?
Pre-qualification can be a good first step if you're thinking about buying a home and want to know how much you might be able to borrow. You can use the results to set goals while… Save on down payment and closing costsAnd to adjust filters while searching homes online.
Learn more: How much should the down payment be for a house?
Once you're serious about your home search, getting pre-approved for a mortgage may be a better option. A lender evaluates many of the same information and documents that it uses to approve your mortgage, which may give you more confidence that you will be able to get approved for a mortgage with the same terms. If you don't get pre-approved today, you can still learn what you might need to do to increase your chances of getting pre-approved later.
However, even pre-approval does not guarantee that you will receive approval in the end. Even if your finances and credit remain the same or improve, a lender may not approve a mortgage based on other circumstances, such as the condition and appraisal of the home and whether you can afford it Homeowners insurance.
What is a mortgage pre-approval letter?
Another reason to get pre-approved for a mortgage is so your lender can give you a pre-approval letter.
- The letter will state the amount you can borrow based on the information the lender has reviewed.
- You can include the letter with your loan offer to make your offer more attractive to the home seller you have your eye on.
- Lenders can work with your real estate agent to customize the message for each offer.
Maybe you will fall in love with this house Listed for $400,000 And you want to make an offer. Let's say you're pre-approved for up to $450,000 and can afford a 20% down payment, but you don't want to go that far. Alternatively, you can make an offer of $405,000.
There are different rules of thumb, but some agents may suggest you include a letter explaining that you were pre-approved for $450,000 and can borrow more if the home appraisal is low or unexpected costs arise. Others may suggest you include a letter with the pre-approval amount of $405,000 so as not to reveal your hand.
In either case, let's assume the sellers receive your offer and a competing non-cash offer of $410,000. Even if they can get more money from other buyers, they may decide to accept your offer because they feel the deal is unlikely to fall through.
Depending on the lender, the pre-approval letter may be valid for 30 to 90 days. If it expires before you buy a home, you may need to submit updated documents or information to get a new letter.
What documents do you need to get pre-approved for a mortgage?
The pre-approval process will vary by lender, but generally you'll need to create an account online and submit different types of information and documents, such as the following.
Personal information
- Name, current address and contact information.
- Government-issued photo ID.
- Social Security number and card.
- Immigration information.
- Employment history within the past two years.
- Rental history within the last two years.
- Information about other properties you own.
Income and tax information
- Recent payment vouchers.
- Offer letter for a new job.
- Verify self-employment income, such as your company's financial statements.
- Proof of other types of income, such as disability or alimony.
- Gift message if you are receiving a gift.
- Tax returns from the past two years.
- Recent W-2s and 1099s.
Account statements
- Checking and saving.
- Mediation.
- Retirement accounts, such as IRAs and 401(k)s.
- Loans.
- Credit cards.
Get pre-approved with several lenders
Shopping for a mortgage can be important to get one with the best terms. Depending on your situation, this could mean a lower interest rate, lower closing costs, and access to… Helping first time home buyersA Large loan amountor Adjustable rate.
Learn more: How are mortgage interest rates determined by lenders?
Since mortgage brokers and lenders may have access to different types of mortgages and programs, you can try getting pre-approved a few times and compare your options. In general, lenders and brokers will require similar paperwork, so it's just a matter of taking the time to submit everything to each company.
If you're not already familiar with the term, a mortgage broker is a professional who can help you compare mortgage offers from a variety of lenders. Lenders often pay the broker a fee for bringing them new clients.
Obtaining multiple pre-approvals can also set you up for success later on. You may want to hold off selecting your lender and locking in a rate until your home offer has been accepted. And if you're already pre-approved from several companies, it may be easier to compare offers based on today's rates and then choose your lender.
Ready meals
Mortgage pre-qualifications and pre-approvals are two ways to find out how much you might be able to borrow to buy a home. Although some lenders use the two terms interchangeably — or even offer different terms, such as verified pre-approval — pre-qualification is generally the less stringent and helpful of the two.
Once you're serious about buying a home, a pre-approval letter can make your offer more competitive. Getting pre-approved from several lenders can also help you more accurately understand your borrowing limit, estimated interest rate, and resulting monthly payments.
Learn more: How much house can you afford?
