Pre-qualification is an informal look at your income vs. debt to see how much of a mortgage loan you might qualify for. Pre-qualification does not take your credit into account, so it does not guarantee loan approval. It's just a quick review of your income and your debt -- the two factors that make up your debt-to-income ratio.
What is Pre-Approval?
Pre-approval means a mortgage lender has examined your credit and income much more thoroughly. When you get pre-approved, the lender will look at your finances as if they were approving you for an actual loan -- in other words, in great detail. This review will give you a good idea how much of a mortgage loan you can afford.
Here’s a more formal definition of pre-approval: The process of applying for a loan and obtaining approval for a maximum loan amount before having a purchase agreement.
Benefits of Pre-Approval
With a pre-approval letter in hand, you can be more confident that the lender will approve your actual loan (after you make an offer on a home). Being pre-approved also shows sellers you’re serious about, and capable of, buying their house. This can be a factor in hot markets where the sellers receive multiple offers.
For example, if you bid on a home along with three other prospective buyers, but you’re the only one who has been pre-approved by a lender, then you stand the greatest chance of having your offer accepted.
The sellers will be more comfortable with you since a lender has said, in essence, "Yes, this person is worthy of a home loan." The buyers without pre-approval, on the other hand, would be "unknown quantities" to the seller.
Keep in mind, however, that while a pre-approval is stronger than a pre-qualification, it's still not a guaranteed loan. After you make an offer on a home, the mortgage lender will once again review your finances and credit. They'll also have the house appraised. Only when they've approved of both you and the house will they make an actual loan commitment.
Conclusion
Pre-qualification and pre-approval are two different things. Think of pre-qualification as a quick review from the lender, and pre-approval as a longer and more detailed evaluation. Pre-approval will help you identify credit problems early on. Pre-approval also shows buyers you're serious about buying.
Therefore, it's a good idea to get pre-approved before you start the house-hunting process.
* Copyright 2006, Brandon Cornett. You may republish this article in its entirety, provided you leave the byline, author's note and website hyperlink intact.
