Buying a house is an exciting time, and it’s natural to want to start your search right away. But before you download the Zillow app in an HGTV-induced haze of wrap-around porches and open floor plans, there are a few things you should consider.
For instance: Have you thought about how you’re going to pay for that three-bed, two-bath ranch? And do you know what paperwork a mortgage broker might require before working with you? If not, you might want to look into mortgage pre-qualification and/or pre-approval. If you start the mortgage application process before you start your home search, you can have a better idea of whether you can afford your dream home.
While the terms pre-qualification and pre-approval are often used interchangeably — and their exact definitions may vary among lenders — it’s important you understand both when you start thinking about buying a home.
What is pre-qualification?
Think of pre-qualification as a prerequisite to enrolling in House Hunting 101.
Pre-qualification is typically an informal process that relies on self-reporting basic info, like your income, assets, debt, and potential down payment, to a lender. This step can be done in person, over the phone, or online (depending on the lender), and because most lenders don’t conduct a credit check, it’s easy for just about anyone to get pre-qualified.
The upside of this is, since there’s no hard inquiry involved, your credit score won’t take a hit. And the insight it provides on how much you can afford to spend on a house is helpful. The downside? A mortgage pre-qualification letter doesn’t carry much weight when put in front of a home seller.
What is pre-approval?
If getting pre-qualified is a prerequisite to taking House Hunting 101, then pre-approval is actually signing up for the class. No, you’re not technically in yet. But at the very least, you’re on the waiting list.
Pre-approval is a lengthier and more thorough process than pre-qualification. In this step, lenders want to see actual paperwork, including pay stubs, W2s, residential history, and bank statements from the past two years. They’ll also require a form of ID (like your driver’s license) and your Social Security number to conduct a check on your credit history and credit score.
Once your documentation has been reviewed and financial history and assets have been verified, you could be eligible for a pre-approval letter. (This can take anywhere from a day to a couple of weeks, depending on the lender’s process.)
More formal than pre-qualification, mortgage pre-approval letters spell out exactly how much money your lender is willing to loan and at what interest rate. Not only should this give you confidence in your purchasing power, but it also makes sellers confident that you’re serious about making an offer.
Borrower beware: You’re not guaranteed a mortgage yet.
Mortgage pre-approval letters represent a commitment from your lender — but not a guarantee that you’re going to receive a loan. You still have to go through the mortgage-underwriting process to receive the actual money.
And since pre-approval letters are non-binding, you may want to add lenders to your shopping list. If you get pre-approved by multiple mortgage lenders, you will have more financial options down the line. Remember: While loan offers may look similar, what seems like a tiny difference in interest rates now can add up over time.
A word of caution: Pre-approval does require a hard inquiry (a full credit history and credit score check), which can impact your credit score. But don’t let this stop you from exploring your options. If multiple mortgage lenders all request inquiries within a reasonably short timespan (typically two weeks to a month), the requests are lumped together and only count as a single hit.
Because a pre-approval letter is generally valid for 60 to 90 days (depending on the lender), you should only take this step once you’re close to making an offer.
Is one better than the other?
In short: no. Actually, it’s probably best to do both.
Getting pre-qualified has plenty of benefits. It’s relatively quick, and there’s no commitment involved, so it’s a great way to get an idea of how much house you can afford. It can also clue you into whether or not your credit score needs a little boost.
While a mortgage pre-approval letter isn’t required to put an offer on a house, it can greatly increase your chances of landing your dream home. Especially in competitive markets, pre-approval may help you stand out from other potential buyers.
Today’s real estate market moves quickly — so fast that some houses aren’t even on the market for a full day (especially in major cities throughout California, Colorado, and Texas). Pre-approval makes you much more attractive to sellers. Not only does it let them know you’re serious about purchasing, but you’re also more likely to be approved for a mortgage (which will speed up that process).
Get pre-approved or pre-qualified today.
When it comes to buying a home, knowing what type of home fits your budget is essential — and both mortgage pre-qualification and pre-approval are steps you can take to get there.
While neither guarantees you will receive a mortgage, both deliver an estimate of what kind of mortgage you can expect when the time is right.
If you’re ready to get a head start on your house hunting, we’re here to help you get pre-qualified or pre-approved.
Start making your home-owning dream a reality!