The Commonwealth Blog

Monday, November 13, 2017

Pre-Approved vs. Pre-Qualified: Why It Pays to Know the Difference

Navigating the home buying process for the first time can seem complicated, but being financially prepared can help you land the home you want. Two financial terms you should start familiarizing yourself with are “pre-approved,” and “pre-qualified.” While they sound similar, there’s a significant difference between them—and it’s important to understand each when making an offer on your new home. Don’t let a misunderstanding stop you from getting the house you want. Learn more about what each term means for your financial situation.

What is Pre-Qualification?

Getting pre-qualified is often the first step in the mortgage process. You meet with your bank or lender and give them an idea of your overall financial picture, including debts, your annual income, and any assets you have. Then they’ll let you know what mortgage amount you can qualify for, in a general range. You can get pre-qualified over the phone or online, and it doesn’t require a credit check or report. This step is important so you can figure out how much house you can afford and what loan options will work for you.

However, getting pre-qualified doesn’t mean that the loan amount is certain, or even that you’ll necessarily be approved for a mortgage. It’s all an estimation that will become clearer when you get pre-approved for a mortgage.

What is a Pre-Approval?

After you’ve gotten pre-qualified, pre-approval is the next step. Whether you choose to go with your bank or a different lender, you’ll complete a mortgage application (and probably pay an application fee) and go through an extensive check on your financial background and credit. You’ll have to provide documentation, including financial records, pay stubs, and more. At this stage, your lender can give a specific mortgage amount you’re approved for—giving you a maximum budget (with your down payment) toward your future home. You’ll also be given official interest rates, loan term options, and will possibly be able to lock in the rate before putting down an offer.

Why Do Both?

As you go through the house hunting process, you can get an idea of what you can afford based on loan calculators and what you’re currently paying for rent. Pre-qualification and pre-approval together let you get on track toward finding the right priced home and getting your financing. Being pre-approved will help you move quickly when you’ve found the right house.

Remember, pre-approval and pre-qualification are not the same. While getting pre-qualified is an important step in the process, pre-approval lets you make an offer knowing your financing is in place.

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