When you want to make an offer on a house, chances are the seller will want to know whether you’re pre-approved or pre-qualified for a loan. What difference does it make? It depends on you who ask. We’ll explain.
What’s the difference?
Many say that pre-qualification is the preliminary step in the mortgage process, where a lender runs your credit and talks to you about your goals, and pre-approval takes it one step further by requiring verification of your pay stubs and tax returns. But in reality, these two terms are often used interchangeably. According to the Consumer Finance Protection Bureau, there is often not much difference between pre-approval and pre-qualification. Sometimes, different lenders may even have different definitions for each. Confusing, right?
So which one do you need?
The end goal is the same: to give sellers the confidence to accept your offer. So make sure you understand what you’re getting, and find out exactly how your lender defines “pre-approval” or “pre-qualification.” Talk to your real estate agent to determine which is more credible in your market.
Regardless of what your lender calls it, you’ll receive a letter that states they are willing to let you borrow a specific amount of money. But remember, neither pre-approval nor pre-qualification (we’ll stick with “pre-approval” from here on out to make it simple) is a guarantee that you’ll get a home loan. Neither is an offer to lend, a commitment to make a loan or a guarantee of specific rates or terms. The lender may want additional documentation and will need to do an appraisal of your new home before actually extending a loan.
That means even though you have the pre-approval letter in your hands, this is NOT the time to go buy a new car, quit your job or run up credit card debt. Any big changes to your finances or debt load are likely to be picked up once you actually apply for a mortgage loan. Lenders aren’t committed. But on the flip side, neither are you. A lot of buyers think once they’ve got a pre-approval letter they have to use that lender. You don’t.
Why you should seek pre-approval
At this point, you may be thinking that the right time to get pre-approved is right when you find the home you want to buy. But getting a pre-approval letter at the beginning of your home search has many advantages.
First, you’ll know upfront what kind of loan you will be approved for. That can help set your price range. You can also get pre-approval from multiple lenders. Remember, just as the lenders haven’t fully committed to give you a loan, you don’t have to fully commit to getting your loan from them. Even if you use the letter as part of an offer, you are still free to get your loan elsewhere if you find a better deal. Use the pre-approval process to compare rates and lenders. And don’t worry about multiple credit pulls damaging your credit score. Within a two-week period, all mortgage inquiries only count as a single pull.
Second, you’ll be able to move fast. Pre-approval letters are good for a specific period of time, usually 60 to 90 days. Getting pre-approved early can help you be ready to send in an offer ASAP because you won’t have to wait a couple of days for the lender to issue you a pre-approval letter.
Pre-approval also signals to everyone else, from real estate agents to sellers, that you are serious. In a competitive market this is particularly important. Let’s say you find a home you love and put in an offer saying you’re a pre-qualified. Someone else makes an offer on the same home but they are pre-approved. Guess which offer is likely to be accepted? In a very hot market, sellers may not even want to bother looking at your offer until you are pre-approved. If you’re looking at bank-owned homes, they require that you submit a pre-approval letter before accepting your offer.
What you’ll need
To get pre-approved you will likely need to provide the following documentation:
Your W-2 from the past two years
Your pay stubs for the past three months
Your tax returns from the past two years
Your checking or savings bank statements for the past three months (this will likely show your down payment funds as well)
Statements for all your other assets (stocks, bonds, retirement accounts) for the last two months
The name and phone number of your landlord (if you are renting) or your current mortgage documents
Your divorce decree, if applicable
If you are self-employed: Your business tax returns for the past two years in addition to your year-to-date profit-and-loss statement and year-to-date balance sheet
Your Social Security number and permission to pull a credit report. (Many lenders will pass on a $30 fee to pull your credit.)
You don’t need to wait to gather all of that before checking out the tool. In fact, depending on your circumstances and if your credit score is especially stellar, you may not need some of the documentation at this stage, but it’s good to have an idea of what you’ll need. Once you’ve provided the required documentation, a pre-approval letter should be in your hands within 24 to 48 hours.
Gulp. What if you can’t get pre-approved?
Work to improve your credit score, pay down debt and make sure you pay your bills on time. Check your credit score for any errors and correct them. Ask your lender what the roadblock was and work to remove it for next time.