What’s the Difference Between ‘Pre-approved’ and ‘Prequalified’ When House Hunting?

Eighty-eight percent of people buying houses get a loan from a bank, credit union or other lender to finance the purchase, according to the National Association of Realtors’ 2018 Home Buyer and Seller Generational Trends Report. To be awarded a loan, the lender typically looks at a person’s ability to pay back the loan, with interest, over time. The borrower will receive two things in the application process – a pre-qualification and pre-approval letter.

What’s the difference?

 

Pre-qualification. This letter means you’re conditionally approved to purchase a home up to a certain price, based on the basic information they have learned about your income, debt and how much you have saved for a down payment.

While this pre-qualification letter doesn’t require the documents and proof of funds needed for a pre-approval, it’s shows homebuyers the price range they can borrow, which dictates their budget for a home.

“Pre-qualification gets them in a position to shop,” says John Pataky, Executive Vice President at TIAA Bank.

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Pre-approval. With a pre-approval letter, you’re deeper into the process and are now providing the details about your employment, your financial information, your credit history, your references and bank statements. A pre-approval letter means the lender is telling you they have confidence in lending you a certain amount of money to purchase a house, pending any issues with the house itself, or unforeseen circumstances with your finances.

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The difference between pre-approval and pre-qualification isn’t just a matter of reporting financial information versus providing documentation for it, a pre-approval letter can be a powerful tool to show a seller when making an offer on a house. A pre-approval letter tells the seller that you have a lender backing you up with your intent to purchase.

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While a pre-qualification makes it easier to shop for a home within the price range you can afford, a pre-approval letter gives you the strength to negotiate a purchase price.

“One of the first things a buyer should do when they begin looking at homes is getting pre-approved for a mortgage,” says Brian Simmons, Founder and CEO of Ask a Lender, an online platform to help consumers shop lenders and loans and get financial advice.

 

If your local housing market is seeing frequent bidding wars and multiple offers on houses, a pre-approval letter could help keep you as a buyer from being overlooked by sellers, who may have many options to choose from when it comes to sale terms and price. Still, a pre-qualification at least lets you begin house hunting.

 

Below are five things to keep in mind about pre-qualification and pre-approval letters:

1. To find the best lender for you, get pre-qualified. You may not know which lender you’d like to borrow from yet, and shopping around by inquiring with three lenders or so, is highly recommended. Rather than just talking to a loan officer about their mortgage loans and available programs, you can use the pre-qualification process to gauge how much a lender would be able to lend to you. Of course, don’t base your choice of lender solely on the maximum price you prequalify for, do also consider the terms, rates and other details of the contract and choose the best that will suit you in the long run.

2. Don’t get pre-approved by too many lenders. Pre-approval includes a full review of your financial background, including your credit history. As a result, too many lender inquiry is noted in your credit report and can negatively impact your credit score because you will have too many recent checks into your credit history.

“It doesn’t necessarily reflect well on you,” Pataky says. “If you’re unsure which lender you want to work with, ask more questions instead and consider trying out pre-qualification first, then only apply for pre-approval once you’ve made your decision.”

3. Neither pre-qualification or pre-approval guarantees you a rate lock.

“The interest rate on your mortgage may be a deciding factor for you in whether you can afford a certain house. But your ability to secure a desirable interest rate through a rate lock, which guarantees your rate will not increase over a set time period – typically between 30 and 90 days – often only happens when you’ve found the house you want to buy,” according to U.S. News.

Rate locks vary based on lender practices, and pre-qualification rarely offers a rate lock. Pre-approval also often doesn’t include a rate lock until you’ve identified the house you would like to purchase – or even until the seller has accepted your offer.

Ask your lender what things are required to ensure you a rate lock, and how long that rate lock lasts. In many cases, the rate lock is only limited to 30 days, which is just enough time to get through the contract period on a house.

4. Pre-approval still isn’t a done deal. Even if your lender is impressed by your salary and credit history of paying off debt, no pre-approval letter is a guarantee that a mortgage will be approved once you’ve found the house you want. There are still other factors at play, like whether your financial situation has changed. So don’t go buying things before you secure a mortgage loan because new outstanding debt can change your situation.

“The factors by which you were pre-approved have to be maintained,” Pataky says. “That means not quitting your job, not buying a Maserati to keep up with the Joneses in your new neighborhood and not opening up five credit cards in the last two weeks,” he explains.

Another factor standing between you and a mortgage approval is the house’s condition and the appraised value of the house. Even if you’re pre-approved to buy a house for $400,000 and agree to that same price with the seller, if the house was appraised for only $375,000, your lender will likely only approve you for a mortgage on the house at $375,000. It can change everything. You would then have to renegotiate on the price with the seller because now your budget is lower, or you would have to come up with the extra cash on your own, or may have to back out all together and starting your search for a house all over again.

5. Keep asking your lender questions. Even if you’ve bought a home with a mortgage before, it’s likely been at least a few years, and the process may feel different. At every step of the way, you shouldn’t be afraid to ask your lender about expectations, timing and documents you should have ready to help streamline the process as much as possible.

“During the pre-approval process, the buyer will need to provide some of the documentation their loan officer will use when it’s time to underwrite the loan,” Simmons says. “This is a good opportunity to ask the lender questions about the process and get a checklist of documents the lender will need, such as pay stubs, bank statements and tax documents.”

The fact that you’re already looking to better understand the lending process and the difference between pre-qualified and pre-approved puts you at an advantage in the home-buying process.

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“Typically we find out that the consumer who seeks the education, the knowledge and the discipline to go through a relatively qualitative process … they’re fairly responsible,” Pataky says.

 

Source: US News

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