If you’re in the market for a new home, you may have heard the terms “mortgage pre-qualification” and “mortgage pre-approval” being thrown around. It’s important to understand the difference between these two types of evaluations, as they can affect your ability to secure financing for your new home.
What is mortgage pre-qualification?
Mortgage pre-qualification is a quick and easy process that gives you an estimate of how much you may be able to borrow for a home loan. It’s based on basic information you provide about your finances, such as your income, debts, and assets. Pre-qualification is not a guarantee of mortgage approval, but it can give you an idea of how much you may be able to borrow and can help you narrow down your home search to properties within your budget.
What is mortgage pre-approval?
Mortgage pre-approval is a more in-depth process than pre-qualification. It involves a lender reviewing your financial information in detail and issuing a letter indicating that you are approved for a mortgage up to a certain amount. Pre-approval is not a guarantee of mortgage approval, but it does show sellers that you are a serious buyer and can help you negotiate a better price on a home.
Differences between Pre-Qualification and Mortgage Pre-Approval
There are a few key differences between mortgage pre-qualification and pre-approval:
- Depth of evaluation: Pre-qualification is based on basic financial information you provide, while pre-approval involves a more thorough review of your finances.
- Strength of commitment: Pre-qualification is a less formal process and does not carry as much weight with sellers as pre-approval, which demonstrates a stronger commitment to the home buying process.
- Time commitment: Pre-qualification can be done quickly, often in a matter of minutes, while pre-approval can take several days as the lender reviews your financial information in detail.
Here is a comparison of the key differences between the two:
Mortgage pre-qualification:
- Does not require a mortgage application or application fee.
- Does not involve a credit history check.
- Is based on a review of your finances, including your income, debts, and credit score.
- Does not require an estimate of your down payment amount.
- Will give you an estimate for a loan amount, based on the information you provide.
- Will not give you a specific loan amount or interest rate information.
Mortgage pre-approval:
- Requires a mortgage application and may involve an application fee.
- Involves a credit history check.
- Is based on a more thorough review of your finances, including your income, debts, and credit score.
- Requires an estimate of your down payment amount.
- Will give you a specific loan amount and interest rate information.
- Is generally considered to be more reliable than mortgage pre-qualification, as it is based on a more thorough review of your financial information.
How long does pre-qualification or pre-approval take?
Pre-qualification can often be done in a matter of minutes, either online or over the phone. Pre-approval, on the other hand, can take a few days to a week, as the lender reviews your financial information in detail and verifies your employment, income, and assets.
What information do I need to provide?
For mortgage pre-qualification, you’ll typically need to provide basic information about your finances, such as your income, debts, and assets. For pre-approval, you’ll need to provide more detailed financial information, such as copies of your tax returns, pay stubs, and bank statements. You may also need to provide proof of employment and any additional documentation requested by the lender.
Which is right for me?
Whether pre-qualification or pre-approval is right for you depends on your needs and goals. If you’re just starting to shop for a home and want to get an idea of how much you may be able to borrow, pre-qualification can be a good place to start. On the other hand, if you’re ready to make an offer on a home and want to show sellers that you are a serious buyer, pre-approval may be a better option.
FAQ:
Does pre qualification guarantee a mortgage?
Pre-qualification is not a guarantee of mortgage approval. It is simply an estimate of how much you may be able to borrow based on the basic financial information you provide.
How long is a home loan approval good for?
The length of time a home loan approval is good for can vary depending on the lender and the specific terms of the approval. Some loan approvals may be valid for a few months, while others may be valid for up to a year. It’s important to check with your lender to determine the specific expiration date of your approval and to reapply if necessary.
Can you get pre-qualified but not approved?
Yes, it is possible to get pre-qualified for a mortgage but not be approved for the loan. This can occur if the lender finds discrepancies in your financial information or if your credit score has changed significantly since you were pre-qualified. It’s important to remember that pre-qualification is not a guarantee of mortgage approval and that the lender will still need to review your financial information in detail before issuing a final approval.
Does prequalification hurt credit score?
Pre-qualification typically does not involve a credit check, so it should not affect your credit score. However, if you choose to move forward with a full mortgage application after pre-qualification, the lender will likely run a credit check as part of the approval process, which could impact your credit score.
What credit score is needed for pre-approval?
The specific credit score needed for pre-approval can vary depending on the lender and the type of loan you are seeking. In general, lenders look for a credit score of at least 620 for conventional loans and 580 for FHA loans. However, some lenders may have stricter credit requirements and may require a higher credit score for pre-approval.
Is pre-approval a hard or soft credit check?
Pre-approval typically involves a hard credit check, which means that the lender will check your credit history in detail and this check will appear on your credit report. A hard credit check can have a negative impact on your credit score, especially if you have a lot of hard credit checks in a short period of time. However, the impact of a single hard credit check on your credit score is usually minimal and should only be temporary.
Conclusion
Pre-qualification can be a good starting point for determining how much you may be able to borrow, while pre-approval can give you a stronger negotiating position with sellers and demonstrate your commitment to the home buying process. The advantage of completing both steps—pre-qualification and pre-approval—before looking for a home is that it offers an idea of how much a borrower has to spend and prevents wasted time looking at properties that are too expensive. Getting pre-approved for a mortgage also speeds up the actual buying process, letting the seller know that the offer is serious in a competitive market. Additionally, being pre-approved can make sellers more willing to negotiate and can also allow borrowers to close on a home more quickly, providing an advantage in a competitive market.
