The last thing you want is to fall in love with a house that ends up being out of your budget — or even worse, to seal the deal on a house you can’t comfortably afford. Fortunately, you can avoid both of these situations with a mortgage pre-approval or pre-qualification.
A mortgage pre-approval or pre-qualification (lenders often use these terms differently — more on this below) is a process in which you submit financial documentation to a mortgage lender, like a bank or other financial institution. In return, you learn how much they’re willing to lend you and at what interest rate. This closer look at your financial background gives you and your lender a better understanding of how much house you can afford.
An online calculator can give you a ballpark figure, but a pre-qualification or pre-approval from an actual mortgage lender can give you a much more accurate idea of your home budget. That way you can feel confident about your down payment and properly plan for closing costs.
When you make an offer on a house, a pre-approval or pre-qualification demonstrates to the seller you’re serious about the purchase and that you’re likely to be approved for a loan — and both of these qualities make you a much more attractive buyer.
What’s the difference between pre-approval and pre-qualification?
This is where it gets a little tricky, as there’s no hard-and-fast industry-wide definition or process for a pre-approval or pre-qualification. What can help you is taking a look at each mortgage lender’s specific process instead.
Whether it’s called a pre-approval or a pre-qualification, you’ll likely find a lender will offer one of these two options:
An informal process that relies on self-reported financial information about your income, assets, etc. There’s no hard inquiry on your credit, and the process can typically be done quickly by phone or online (for instance, Ally Home’s online pre-approval process can take as little as three minutes!)
A formal process that requires additional paperwork, such as W2s, bank statements, etc., as well as a hard inquiry on your credit history. This process is likely to take longer, but you might come away with a more precise number for how much the lender is willing to loan you. That’s essentially because you’ve already provided some of the documents required to start the loan application process.
Expert 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.
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. Since Ally Home’s pre-approval relies on self-reported information and doesn’t require a hard inquiry on your credit score, you can take the time to work on your credit score, if necessary.
What’s the Ally Home pre-approval process like?
The pre-approval process with us is informal and typically takes only a few minutes to complete. You’ll need to self-report some information, including timeframe and some financial information, so we can help you get an idea of what kind of loan you might qualify for with us. We’ll also conduct a soft check on your credit history, which will not impact your credit score.
Once you have your Ally Home pre-approval letter, you’ll have a better understanding of your house-hunting budget without going through the entire mortgage underwriting process.
When you’re ready to make offers, you can include your pre-approval letter in your bid to sellers. Especially in competitive housing markets where homes may only be for sale for a matter of days, being pre-approved for a mortgage can help you stand out among other buyers.
Within our online platform, you can also create a custom pre-approval letter for each house you’re bidding on. For example, you may not want to reveal to a seller that you can afford more than what you’re offering. So, you can get a pre-approval letter for less than your original pre-approved amount.
Is there an expiration date on a pre-qualification or pre-approval?
Depending on the lender, your mortgage pre-qualification or pre-approval will typically last 60 to 90 days because of industry regulations.
If your bank requires a hard inquiry, you might want to wait until you’re close to making an offer to avoid your letter expiring and having to go through the process again.
If your lender only requires a soft credit check (like Ally Home), this time frame isn’t as constricting — you can easily go through the process again without hurting your credit score if you run out of time.
When you’re ready to buy a home, make sure your wallet is, too. By getting pre-approved or pre-qualified, you can have a solid foundational knowledge of how much you can afford, from your down payment to your monthly payments. And then you’ll be one step closer to living in the home of your dreams.