If you intend to start home shopping, it’s important to set yourself up for success. You may have heard about getting pre-qualified or pre-approved for a home loan as part of the home search process. While those terms are sometimes used interchangeably, they’re not the same thing; and it’ll make a difference once you’re serious about putting an offer on the home of your dreams.
Getting pre-qualified is often the first step in buying a home. To get pre-qualified, you provide the lender a general picture of your financial situation, including information about what you earn, the amount of debt you currently have, and how much you have saved in the bank. With this minimal information, the lender provides a general estimate of how much you will get approved to borrow. This amount is not a guarantee. It’s more like a guidepost for the cost of homes you should be looking at (while taking into account how much you plan to use as a down payment).
Because the pre-qualification isn't based on an in-depth look at your finances, getting it is typically easier and faster. The lender will provide you with a letter showing the amount for which you’ve been pre-qualified. That’s what you’ll include once you’re ready to make an offer on a home. It shows the sellers you’re a serious buyer.
Getting pre-qualified can also be a jumping off point for a conversation about the right type of home loan for your financial situation. The more you know prior to making an offer, the stronger you’ll look to the home seller.
While getting pre-qualified helps you look like a strong buyer, getting pre-approved is what’s really required to seal a home deal. Some buyers start the pre-approval process once their offer is accepted. But in hot purchase markets, you may up your chances of being chosen in a multiple-offer scenario if your offer includes a pre-approval from the start.
So what’s the difference? In order to get pre-approved, the lender does a much deeper dive into your finances to identify a true loan amount they are willing to offer you. They look at your credit report, previous years’ tax information, bank statements, salary, assets, and other outstanding debt. Having a pre-approval means your loan is guaranteed as long as the appraisal of the home you want to buy is at or above that amount. If a home appraises for less than what you offered to pay for it, the lender will typically only offer you a percentage of the appraised amount versus the home sales price, and you’ll have to come up with the difference or back out of the deal.
Getting a pre-approval takes longer than a pre-qualification (usually between three to five days) because the lender has to investigate more of your financial information. But the extra effort might very well be worth it if you’re absolutely serious about buying a home right away. If you’re only casually looking, stick with a pre-qualification letter to avoid multiple hits to your credit.
And remember, just because you’re pre-approved for a given amount, does not mean you have to borrow that entire amount. It’s good to discuss your broader financial picture and determine what you feel comfortable paying for a monthly mortgage payment.
If you have questions about the home buying process, or want to get pre-qualified or pre-approved, Orange County’s Credit Union is here to help. Contact us at (800) 506-5070 to speak to a Mortgage Loan Consultant today or request a call for another time that’s convenient for you.