Are you considering obtaining a loan in order to purchase a home? If so, you will want to know the difference between being pre-qualified and pre-approved for a loan. In this way, you will be better prepared to budget your purchase and negotiate with the seller once you find the property that you wish to purchase.
What is Pre-Qualified?
Getting pre-qualified for a loan is a relatively simple process that can be completed over the phone or online. As a part of this process, you provide information to the lender about your debt, income and assets. The lender then assesses this information and provides you with the amount that you are likely to be able to borrow.
Since this process does not involve completing a credit check and because it is based solely on the information that you provide to the lender, the number quoted is not a guaranteed amount. Getting pre-qualified can, however, help you get a better idea of how much you can afford to put toward the purchase of a home. This, in turn, will help you to narrow down your options. In addition, a pre-qualification letter will help show the seller that you are serious about making a purchase.
What is Pre-Approved?
Getting pre-approved for a loan takes the process a step further than getting pre-qualified. To get pre-approved, you have to complete an official mortgage application. This means providing the lender with documents to prove your financial situation while also allowing the lender to check your credit rating. After gathering this information, the lender can pre-approve you for a mortgage up to a certain amount. Unlike getting pre-qualified, the pre-approved amount is a guaranteed approval unless something changes in your financial situation.
To get pre-approved, you may have to pay an application fee. In some cases, this fee can be several hundred dollars. While this extra cost may seem burdensome, a pre-approved loan carries far more weight with a seller than one that is just pre-qualified. If you are competing with another buyer, the fact that you are pre-approved may help you win your bid because the buyer knows your mortgage application is almost guaranteed to go through. You may also be able to lock in a particular interest rate when getting pre-approved, which can help you to save a significant amount of money over the lifetime of the loan.
Which is Right for Me?
Deciding which of these two options is right for you will depend upon your situation. If you are trying to purchase property in a hot market, getting pre-qualified will give you an edge on other buyers who may be looking to purchase the same property. Similarly, if a raise in interest rates is on the horizon, getting locked into a lower rate as you take the time to explore your real estate options is certain a sound financial move to make. On the other hand, if interest rates are steady and you don’t anticipate competition within the market where you are making a purchase, getting pre-qualified may be all that is truly necessary.