Pre-Qualification vs. Pre-Approval
Once you’ve made the decision to buy a home, you’ll typically speak with a Real Estate Agent or Loan Officer (since financing is the first step, we recommend reaching out to your Sidwell Loan Officer as job one). Regardless of whom you call first, Realtor or Loan Officer, there are a couple of terms you are going to hear: Pre-Qualification and Pre-Approval. They both relate to your ability to qualify for a mortgage loan. Even if you start your search online, you’ll repeatedly see pop-ups that say “Get Pre-Approved” or “Get Pre-Qualified.” Since this may be your first experience in the real estate and mortgage arena, let’s get a step ahead by exploring these terms and their importance. And in fairness to your Realtor or Loan Officer, unless you’re paying cash (and you’d need documentation), a lender’s review of your circumstances is the most prudent place to start.
Pre-Qualification
We should first note that Pre-Qualification is a misleading moniker because it does not qualify one to purchase a home, but establishes eligibility. Pre-Qualification is the process of reviewing your income and debts to determine the amount you have available each month to service a mortgage debt – after you’ve paid your existing obligations. This establishes the maximum price of the home you may be able to buy. PreQualification is NOT a loan approval, but again, simply determines the maximum purchase price of the home you’re eligible to buy.
Pre-Approval
Pre-Approval means that you have obtained a written lending commitment, subject to certain conditions, prior to searching for a home. Loan approval occurs after your loan application has been underwritten. Underwriting is the formal process of reviewing your present financial status and your financial history (including credit report, pay stubs, tax returns, employment history, etc)., within the context of established lending guidelines and credit scoring models, to determine whether you present an acceptable lending risk.
Pre-Approval differs from Pre-Qualification. As stated before, Pre-Qualification simply establishes the amount you’re eligible to buy. On the other hand, Pre-Approval confirms you meet all requirements and are fully qualified to purchase a home in a certain price range, as evidenced by a written conditional lending commitment. Pre-Approval also means you’re essentially a cash buyer with the accompanying gravitas and bargaining power.
So there you have it, Pre-Qualification & Pre-Approval.
Now you’ll have an idea as to what’s being asked when you speak with a real estate agent or loan officer.
We’ll see you at the next Post.