Beginning the mortgage process can seem mind-boggling at first, but there are two steps to take prior to ever applying for a loan that can make obtaining your dream home easier than expected.
These steps are pre-qualification and pre-approval. Although they have similar names, they are quite different, and knowing the difference between them can save you from unnecessary hassles down the road.
Becoming pre-qualified is the initial step in the mortgage process and involves providing a potential mortgage lender with an overall picture of your debts, income, assets and cash available for closing costs and down payments. This step can be completed over the phone in just a few minutes.
What many people don’t know is this vastly differs from being pre-approved. Unlike a pre-approval, a Pre-qualification is a good starting place because it doesn’t include an inquiry into your credit report and doesn’t ask for proof of assets, income or debts. Because you’re the supplier of the information, the pre-qualification process only gives you a rough estimate of how much home you can afford. Pre-qualification provides you with the amount of money which you might be expected to be approved for, and what type of loan you might be able to receive.
A pre-approval includes a more thorough investigation into your financial background and credit report, requiring documentation of your current assets and debts. The pre-approval process is more involved and takes longer to complete, but is necessary to find out what kind of mortgage you’re able to afford. It also gives you a leg up on competitive home buying.
Once you’ve provided documentation and your information has been verified, a lender will be able to tell you a more specific mortgage amount that you could be approved for. Additionally, you’ll have a better idea of what your interest rate will be. This gives you a very precise picture of how much home you can afford.
This puts you at an advantage during a competitive buying process. It shows lenders and sellers that you’ve been more thoroughly investigated, have a good idea of what you can afford and how serious you are about buying.
It’s important to remember that being pre-approved isn’t a guarantee that you will receive a loan. The next step is going through the underwriting process and awaiting final approval. Some key aspects to keep in mind to assist in your confirmation of a loan after a pre-approval are:
- Keep up-to-date on your bill payments
- Don’t make any large purchases or incur more debt
- Don’t accept new credit inquiries
- Don’t change or quit your job
Being either pre-qualified or pre-approved doesn’t constitute an approval for a loan; it just starts you off in the right direction. Do the right thing, help yourself down the line and become pre-qualified or pre-approved today, so you can have the house of your dreams tomorrow.