Getting pre-qualified or pre-approved for a mortgage loan gives you more concrete information about what you can and can’t afford. However, the terms are very different and are misunderstood by many.
Here are what those terms really mean.
Getting pre-qualified for a loan is a very easy process. It’s an initial evaluation of your creditworthiness. You provide the lender your approximate income, the amount of debt you’re carrying, and any other important details from your credit history. The lender uses these figures, which have yet to be verified, to calculate how much money you might be eligible to borrow. The lender may provide you with a pre-qualification letter, which has more details about your likelihood of obtaining a loan.
However, all information you provide during pre-qualification is subject to verification by the lender when you submit your actual loan application. There is no guarantee of a mortgage loan, as your financial situation has not been verified.
Many sellers are educated on this by their real estate agents and ignore pre-qualification letters from lenders.
Pre-approval means that your financial situation has been verified by the lender. It’s more involved than pre-qualification but still relatively simple.
You will have to fill out a loan application and provide the necessary supporting documents required for a home loan. The lender will examine your financial situation—your credit report, your employment history, your income—and decide what interest rate to offer and the maximum amount you would be permitted to borrow based on your debt to income ratio.
Although pre-approval provides more certainty to a borrower than pre-qualification, it also does not guarantee a mortgage loan. That involves other conditions, such as an assessment of the property you want to purchase or one that you’d like to renovate.
Before you make plans to spend your mortgage loan, make sure you know how much you can expect to borrow. Talk with your lender and get a professional examination of your financial situation.
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