What’s better: pre-approval or pre-qualification?
“Congratulations! You’ve been pre-approved!” Does this sound familiar? Feels good, right? Like a step in the right direction? Of course it does. That’s what companies want you feel even if it is a little deceptive up front. You’ve probably seen this language used by mortgage, auto, or credit card lenders in emails, texts, or marketing flyers in the mail. If so, you’re not alone.
When you’re thinking about buying a home, and wondering where to start, the first steps are: read the Ultimate First Time Home Buyer Checklist, learn what questions to ask, get your finances in order, and compare real estate agents.
When it comes to getting pre-approval vs pre-qualification, what’s really better? How easy is this process? How long does it take? What do I need to do? What does pre-approval vs pre-qualification mean? Let’s find out.
Hearing you’re pre-qualified sounds great. But, you still have a long way to go. Rick Hogle, of Supreme Lending, suggests that loan pre-qualification can provide a general idea of the loan amount in which the homebuyer might qualify. This way you can start looking at houses and have a more specific idea about how much you can afford before you really take a true look.
During Pre-Qualification, there is a lot more self-reporting and less paperwork needed because you discuss the overall picture of your finances with a loan officer. They’ll screen you to determine if you’re a good fit for the level of risk their company is willing to take, and you’ll have an opportunity to learn what types of loans that you might qualify for.
Because Pre-Qualification is easier and faster than Pre-Approval, it’s no surprise that sellers and agents take buyers more seriously if they’ve been Pre-Approved.
With Pre-Approval, there is a lot more paperwork, but there is a lot larger and more tangible reward because of the upfront work required. Here’s an example of what you might be expected to provide: pay stubs, bank statements, tax returns, proof of assets, credit history, employment verification, documentation, expenses, etc.
If you pass the lender’s approval process, the loan officer will then agree, under certain conditions, to loan you a specified amount of money. This can feel very uplifting because it allows you to shop with confidence, and the major benefit is that it helps sellers & buyer’s agents take you more seriously.
Because of the verification on top of verification, there is no self-reporting here. While this is on a case by case basis, the length of your approval can last from 3-6 months.
Similarities: Pre-Approval vs Pre-Qualification
- Not a guarantee from a lender
- Helps you shop with confidence
- Provides estimate for a likely loan amount
- Both save time during home search
- Helps you with a more realistic look by only looking at homes in your budget
- Shows sellers and agents you are serious.
Differences: Pre-Approval vs Pre-Qualification
- Not too many differences. But, they are slight.
- In some markets, these terms are interchangeable
- Pre-qualification = General overview of your credit history and bills. Lots of self-reporting.
- Pre-Approval = A significant amount more of documentation and verification. Usually carries more weight when it comes to having an offer you make be taken seriously.
What do I need to be careful of?
Mortgage Quizzes – Chances are you’ve seen a quiz on Facebook that says – “The only 5 questions you need to find the right mortgage lender”. These are not only bogus, but they are highly misleading. These are nothing but a marketing trick to get your information, and no matter how you answer the questions, you’ll be routed to the mortgage lender who created the “Quiz” under the guise of highlighting different results based on your unique answers. Oh? You selected answer C. How about Mortgage Lender A. Oh? You selected answer B. How about Mortgage Lender A? You get the picture.
The guise of commitment – Just because a loan offer pre-qualifies or pre-approves you, you don’t owe them anything. Just like you can shop REALTORS® for different rates, lenders are the same. It’s a competitive space, so it’s in your best interest to do your research and weigh your options.
How long does the pre-approval process take?
Angela Cohen, a branch sales manager with Network Home Loans in Lynnwood, WA suggests that it’s typical for this to take 1-2 days.
What other questions should I ask?
If you want to make an offer on a specific home, do you need to be pre-approved or is pre-qualification good enough?
Some sellers might require a letter of pre-approval or pre-qualification. This helps you stand out particularly in competitive markets.
How does your lender define: pre-approval vs pre-qualification?
While pre-approval is nearly universally better, the terms pre-approval vs pre-qualification can carry more or less weight in different markets.
In the end…
Today we reviewed the similarities and differences between pre-approval vs pre-qualification.
To prepare your finances now, prior to buying a home or applying for a loan, you should: keep paying your bills on time, saving money when you can, and avoid changing jobs to help keep you credit score high.
Do you have any questions about pre-approval vs pre-qualification? Let us know.