Buying a home can be stressful. Often the biggest source of that stress? Understanding how much you can afford and sticking to that budget.
For many homebuyers that means starting the mortgage process before you begin your home search. Mortgage pre-qualification and pre-approval are two ways you can better understand how much home you can afford. While the two terms are often used interchangeably — and their definitions may vary between lenders — it’s important you understand both when you start thinking about buying a home.
What is pre-qualification?
Pre-qualification is one of the first steps in your journey to buying a home. It is typically an informal process that relies on self-reporting basic information to a lender, including your income, assets, debt and potential down payment. Depending on the lender you choose to work with, pre-qualification can be done in person, over the phone or online. Based on the information you provide, you’ll receive an estimate of how much you can afford to pay for your new home.
The upside of pre-qualification? It’s easy for just about anyone to get pre-qualified and it can happen in a matter of moments. Also, since there’s no hard inquiry involved, your credit score won’t take a hit. The downside? The amount you qualify for is really just an estimate and doesn’t carry much weight when presented to a seller.
What is pre-approval?
Pre-approval, on the other hand, is a lengthier and more thorough process. When getting approved, lenders will want to see documentation like pay stubs, W2s, residential history, bank statements and tax information. You’ll also be required to share 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 those documents have been reviewed and verified, you may be eligible for a pre-approval letter, spelling out exactly how much money the lender is willing to loan and at what interest rate. This is a win-win for both the buyer and seller when it’s time to make an offer — it gives you confidence in your purchasing power while demonstrating to sellers that you are a serious buyer.
The downside of obtaining a pre-approval letter is that it can take anywhere from one day to a couple of weeks, depending on your lender’s procedure, so allow extra time for this step.
Pre-qualified vs. pre-approved: What’s the difference?
There’s no standard definition for pre-approval or pre-qualification — so both processes are unique from one mortgage lender to the next.
With this in mind, you should look into the potential lender you may choose to work with and speak to a representative to walk you through their process and how they particularly define what it is they offer, whether pre-approvals or pre-qualifications.
Generally, lenders offer one or both of these options:
- An informal process that relies on self-reported financial information (income, assets, etc.) and no hard inquiry on your credit that gives an estimated loan amount
- A formal process requiring W2s, bank statements and other paperwork and a hard inquiry on your credit history that gives a more precise loan amount
Going through a mortgage pre-qualification or pre-approval process can be a helpful indicator to know how much you can afford based on your income. It can also let you know if you should work on improving your credit score before you apply for a loan. Ally Home’s pre-approval process relies on self-reported information and doesn’t require a hard inquiry on your credit score, so you can take the time to work on your credit score, if necessary.
Pro tip: As you explore options from different lenders, several of them may conduct a hard inquiry on your credit. As long as they’re all within a relatively short time span (usually 30 to 45 days), it will only count as a single inquiry on your credit history.
How long does the process take?
The amount of time depends greatly on the lender’s methodology, but pre-qualification will typically take a day (or even less), while pre-approval will take at least one day (more often several days to a week). Work with your lender to understand exactly what is being done and when you can expect to be qualified or approved.
Does pre-approval guarantee a loan?
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 funds, along with a third-party appraisal and inspection.
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 between interest rates now can add up over time.
Which is better: Pre-approval or pre-qualification?
The short answer: It depends on where you are in the home-buying process. Pre-qualification is a relatively quick way to find out how much house you can afford with no impact to your credit scores, and therefore is a good first step in your home-buying process. And while a pre-approval letter isn’t required to put an offer on a house, it can help you stand out from other buyers and increase your chances of having your offer accepted. Keep in mind that a pre-approval letter is generally valid for 60 to 90 days (depending on the lender), so you should only take this step once you’re close to finding a home and prepared to make an offer.
With today’s fast-moving real estate market — some homes are on the market for less than a full day — pre-approval makes you much more attractive to sellers. It not only lets them know you’re serious about buying, but also that you are more likely to be approved for a loan.
What happens after pre-approval?
Once you have your pre-approval letter, you can narrow down your home search to those that fit into your budget. When the time comes to make an offer, the letter will be included in your bid to sellers. In this competitive housing market where many homes are selling quickly, being pre-approved for a mortgage could work to your advantage.
Ally Home’s pre-approval process
Our pre-approval process is informal and typically takes only a few minutes to complete. You’ll need to provide some information, such as your desired timeframe, income, and assets to help us get an idea of what kind of loan you might qualify for. We’ll also conduct a soft check on your credit history, which will not impact your credit score.
In addition, Ally Home customers can create a custom pre-approval letter for each house they bid on. Since you may not want to reveal to a seller that you can afford more than what you’re offering, you can get a pre-approval letter for less than your original pre-approved amount.
Get pre-approved today
Knowing what you can afford is crucial when shopping for a home — and both mortgage pre-qualification and pre-approval can help you get there. When the time is right to put in an offer, you’ll be much more prepared and one step closer to landing the home of your dreams.
If you’re ready to get a head start on your house hunting, we’re here to ease some of your stress and help you get pre-approved.