Should You Get Mortgage Pre-Qualification or Home Loan Pre-Approval?
As you prepare to buy your first home, you might be wondering if getting pre-qualified for a mortgage or pre-approved for a loan is necessary. We hear that question often from Addition Financial members, and it’s a good one to ask. Certainly, many banks and lending institutions want people looking for a home to focus on mortgage pre-qualification or a home loan pre-approval.
What we find is that some of our members (and prospective members) don’t understand what these terms mean and how they differ from one another. In this post, we’ll explain both and talk about the benefits of each option.
What is Mortgage Pre-Qualification?
Mortgage pre-qualification is usually the first step in the home-buying process. It’s a very simple procedure. It requires disclosure of basic financial information, but it’s not a true approval. You might think of it as a preliminary round.
Typically, you’ll need to disclose:
Your current assets
Your current debts
Your current income
The mortgage lender doing the pre-qualification will review the information you disclose and give you their best estimate of what size mortgage you might be approved for. It’s important to note that this figure is not carved in stone. It’s merely meant to be a guess, so you can decide what your price range is.
The pre-qualification process is also an opportunity for you to talk to your lender about your situation, what you can afford and what your options are.
What is Home Loan Pre-Approval?
Home loan pre-approval is far more involved than mortgage pre-qualification. You’ll have to complete a full mortgage application and pay an application fee to your lender.
The mortgage application is quite extensive. You will be giving the lender permission to conduct an extensive credit, asset and debt review on you to determine whether you can qualify for a mortgage with them. The process can take some time.
Because this is a pre-approval, the space that refers to a specific property will be left blank on your application. The idea is to find out how large a mortgage you can get so that you can show prospective sellers that you’re serious and a good credit risk.
By the time you receive your pre-approval, you should know:
The maximum amount you can qualify to borrow
The approximate interest rate you can expect to pay
You’ll get a conditional commitment from your lender. It will authorize you to make offers on homes at or below the price of your pre-approval. Showing a seller that you’re pre-approved can give you a leg up on other homebuyers who might not have gone through the trouble of getting pre-approved.
Which is Better: Pre-Qualification or Pre-Approval?
If you’re shopping for a home, you might be wondering which of these options is best – or if you should do both.
Pre-qualification is something you should do even if you’re not sure you want to buy a home yet. Since it doesn’t involve a comprehensive credit check, there’s no risk in doing it. It’s a good first step because it can help you understand what you might be able to afford. Pre-qualifying is also, as we mentioned before, the perfect opportunity to sit down with your lender and ask questions.
If you’re serious about wanting to buy a home, we do think it’s best to go through the pre-approval process, too. It can be very difficult for first-time homebuyers to know how much they can afford to pay. They may also have a hard time figuring out how home prices relate to monthly mortgage payments.
Going through the process will help you spot potential problem areas in your credit history and get them cleaned up. It also gives you the tools you need to choose a price range and begin narrowing your search. And, if you find a home you love and want to make an offer, having a conditional commitment from your lender will give you an advantage.
It is worth noting here that going through the pre-approval process requires checking your credit report. You should be cautious about doing it with more than one lender, since repeated credit inquiries can have a negative impact on your credit score. If you’re sure you want to buy a home, though, pre-approval makes sense and can help you move toward homeownership.
The process of getting approved for a mortgage can feel overwhelming to first-time homebuyers. The pre-qualification process is a good way of getting your feet wet and asking questions, and pre-approval will give you the tool you need to negotiate with sellers and finally achieve your dream of owning your own home.
If you’d like to learn more about Addition Financial’s flexible mortgage options and how we can help you become a homeowner, please click here now.