A house is one of the most expensive investments you will make. If you are in the process of buying or moving house, you will likely need to borrow money to fund it.
As such, applying for a mortgage should be at the top of your list. A mortgage approval will give you a sense of financial readiness, which will make you feel more confident looking at homes.
The mortgage application process involves two steps: pre-approval and pre-qualification. Some people use the terms interchangeably, but there are key differences that every serious homebuyer should know. Understanding how each works might be the difference between scoring your dream home and losing it to another buyer.
What is a mortgage pre-qualification?
A pre-qualification is a quick estimate of how much property you can realistically afford. In this stage, you simply talk to a lender about your income, assets, and debt. Based on this information, the lender estimates how much you can expect to borrow. You can get pre-qualified online, in person, or over the phone.
While there are no guarantees that you will be approved for the same figure, getting pre-qualified can help you finalize your budget. It can also help narrow down your home choices and focus on the right mortgage options. Pre-qualification is a great step for first-time homebuyers who are still hesitant to take the leap. Knowing where you stand financially will help make mortgage shopping less overwhelming.
What is a mortgage pre-approval?
During a mortgage pre-approval, your lender does a formal and thorough evaluation of your financial situation. Unlike pre-qualification, you have to supply your lender with actual documents including:
- Proof of Income and Employment – pay stubs, W-2 , federal or business tax returns
- Proof of Assets – latest bank statements of all your accounts: savings, checking, stocks, 401(k), Roth IRA
- Proof of Identification – driver’s license and social security number
- Credit Score
Be wary of lenders who approve you for mortgages that are higher than your initial estimates. They do this to tempt buyers to shop for more expensive homes, so they can also earn more. Stick to your budget, and you’ll land a home that you won’t regret in the long run.
Remember that your payments on a 15-year mortgage should not go beyond 25% of your take-home pay. Also, a 15-year mortgage is a smarter choice than a 30-year mortgage. It will not only get you out of debt in half the time but will also result in lower interest rates.
Are homebuyers required to get both?
Some home buyers skip pre-qualification and proceed right away to pre-approval. Most mortgage companies tend to favor pre-approved buyers. Securing a pre-approval letter shows sellers that you’re a serious contender and gives you a competitive advantage.
Getting pre-qualified and pre-approved can both give you an idea of the loan amount that you will likely qualify for. With a concrete number in mind, you can focus on homes that will fit your budget and speed up your home search. It will also prevent the disappointment of discovering that the house you want is not affordable for you. Knowing what to expect can reduce some of that frustration and guide you toward the perfect home for you and your family.