Pre-approved mortgage? Pre-qualified mortgage? At the beginning of a house hunt, it might not seem as though there is a lot of difference between the two. But, ask anyone who has lost a bidding war for a home because they lacked mortgage pre-approval and they will tell you there is, indeed, quite a difference.
That still leaves the question of pre-qualified mortgage or pre-approved mortgage? What exactly does a buyer need to be a successful house hunter?
The answer is simple--both.
Step One: Pre-qualified Mortgage
When it comes to mortgages, pre-qualification is like dating--it's the 'getting to know you' period for a buyer and a lender. Nothing's formal. Nothing's promised. But, it's a start.
In order to get pre-qualified for a mortgage, lenders need to see some basic financial information. They will want to know about debts, including student loans. They will want to know about income, both salary and investments. Lenders will also look at assets, like cars and boats and any other big ticket items. Lenders use this information to roughly determine the amount of mortgage a potential buyer can afford.
It helps to get pre-qualified before beginning a house hunt for a few reasons:
- It saves buyers time. Having an idea of price range in the initial stage of a house hunt can help narrow down neighborhoods and focus the search. It also helps buyers manage their own expectations.
- It helps buyers understand their mortgage options. Pre-qualification offers an opportunity for potential buyers and lenders to discuss various kinds of mortgage products.
- It lets buyers shop around for a lender. Applying for pre-qualification from a number of different lenders allows buyers to comparison shop and find the right lender for their situation. It can also give buyers a sense of what it would be like to work with the lender as they move through the home buying process.
Step Two: Pre-approved Mortgage
When it's time to get serious about buying a home, that's the time to take the next step of getting pre-approved for a mortgage. Going back to the relationship analogy, pre-approval is like a marriage proposal. Now, it's down to one buyer, one lender.
At this stage, buyers complete a formal mortgage application. This allows lenders to take a closer look at a buyer's finances. Lenders will require buyers to submit actual documentation of the income, debt, and assets they outlined during the pre-qualification stage. Lenders also check out a potential buyer's credit score and credit history. Because pre-approval is a more in-depth process, it often takes more time. And, many lenders require potential buyers to pay an application fee when they apply for pre-qualification.
Here's where the promise comes in. When a buyer gets pre-qualified for a mortgage, it means a bank has formally agreed to lend them a specific amount of money. Why is this important? Because most sellers (and, frankly, most brokers) won't take buyers seriously without pre-approval in hand. So, if you are ready to bid on a home and you don't have pre-approval, be warned that you may lose out because your offer will be contingent upon securing financing.
The Key To Buying A New Home
Any successful buyer can tell you that the process of buying a home can still be a long walk down the aisle. There are bound to be a few stumbles along the way--like unexpected expenses or repairs. However, taking time at the front end of a house hunt to find the right lender allows buyers to talk through any potential pitfalls upfront. It leaves less chance for unpleasant surprises as the process progresses for the buyers and the lenders.