Pre-qualification and pre-approval are two terms used frequently when searching for a new home. Here's what you need to know about each:
Pre-Qualified
Pre-qualification involves providing a bank or lender with a general overview of your financial situation, including details about your debt, income, and assets. Based on this information, the lender estimates how much you might be able to borrow. The process is quick, typically taking just one to three days, and can be done over the phone or online at no cost.
It's important to note that pre-qualification does not involve a credit report analysis or a detailed assessment of your ability to purchase a home. It’s an initial step that allows you to discuss your mortgage goals and needs with the lender. They can then suggest different mortgage options that might suit your situation.
Pre-Approved
Pre-approval is the next, more detailed step. While pre-qualification gives a general idea of your borrowing potential, pre-approval is a more definitive assessment. To get pre-approved, you must complete a formal mortgage application and provide the necessary documentation for an in-depth credit and financial background check. The lender will then determine your pre-approval amount.
The pre-approval process also gives you a clearer picture of the interest rate you might be offered. Some lenders allow you to lock in an interest rate during this stage or may charge an application fee for pre-approval, which can be a few hundred dollars.
Once pre-approved, the lender provides a conditional commitment in writing for a specific loan amount, enabling you to shop for homes within that price range. This gives you an advantage in negotiations with sellers since you're closer to securing a mortgage.
