Before getting in the car and going to look at homes with your Realtor, the first thing a potential home buyer should do is to get pre-qualified or pre-approved to buy a home. There are meaningful differences between the two and we will explain the high-level differences so borrowers are educated when beginning the mortgage process. Understanding the difference between pre-qualified and pre-approved is a must in order to begin the first step in the mortgage process.
Which is Better Pre-Approval or Pre-Qualification?
The short answer to this question is that neither one of these is better than the other. Both pre-qualified and pre-approved are important by themselves, but the truth of the matter is that one of these tasks normally comes before the other when navigating your way through the mortgage process. The one that normally comes first is the pre-qualification because getting a pre-qualification letter will allow a buyer to go look at homes with their Realtor and have that pre-qual letter to include with their Purchase Offer when they find a home that they like. Here are a few more details about getting pre-qualified vs pre-approved.
Pre-Qualification
There are no official rules, regulations or guidelines on what can be called a mortgage pre-qualification. But getting pre-qualified typically means that a lender speaks to a borrower either by phone or in person, pulls a credit report, and reviews the borrowers complete loan application that includes income, credit, assets, and liabilities.
As a loan officer, when I am reviewing a loan application to pre-qualify the buyer, I am looking at income to make sure they have enough to make the monthly mortgage payment. I am looking at liabilities to make sure the monthly payments including the proposed mortgage payment are low enough to meet the loan program’s debt-to-income ratio guidelines. I look at credit to make sure the credit score is high enough to qualify for the loan program, and I look at assets to make sure there are enough funds to complete the transaction. This process takes time and is a very thorough analysis of a borrower’s financial profile. This is why we encourage borrowers to start the pre-qualification process early, especially if you feel there may be credit improvement work that needs to be done.
Can you buy a House for Less than your Pre-Qualification?
The answer to this question is yes you certainly can purchase a home for less than your mortgage pre-qualification. Just because your mortgage lender may have pre-qualified you for a $2,000 monthly mortgage payment doesn’t mean that you need to “max-out” your payment and go beyond your comfort zone. For some borrowers I speak to, they are very disciplined and no matter what amount I pre-qualify them for they have set a budget that they do not want to exceed. These buyers often decide to purchase a property that falls well under the amount they are pre-qualified for.
Pre-Approval
A mortgage pre-approval is very different than a pre-qualification and the difference is that a pre-approved mortgage has been reviewed and approved by an Underwriter. The pre-qualified buyer will shop for homes with their Realtor, find a property, have an accepted offer that is turned in to their loan officer, and that loan officer will submit the loan file to the loan processor and Underwriter. If all of the asset and income documents are complete, the Underwriter will review the file and issue a Conditional pre-approval for the buyer.
When an Underwriter reviews a loan file and issues a mortgage pre-approval that means the buyer is more than 50% of the way to getting the keys to their home. The only remaining items to gather are the loan conditions written out by the Underwriter as part of the conditional loan approval, and complete the Appraisal.
Final Loan Approval Completes the Mortgage Process
With a conditional loan approval in hand the loan officer communicates to the buyer exactly what the underwriter has identified as being required in order to complete the loan. If the asset and income documents were complete enough up front to allow the loan officer to build a thorough file for the initial underwriting submission, the number of conditions on the conditional loan approval should be minimal in most cases.
The borrowers at this point only need to gather the necessary documents to satisfy the loan conditions and return them to the loan officer so he/she can submit the loan for a final loan approval.
As a loan officer one of the most important things I communicate to a potential client is to get your financial paperwork in order well before you are ready to buy a home. Have your financial paperwork ready and start the pre-qualification process early in case anything comes up related to credit or debt, the two most common problem areas that I see when reviewing clients loan files. By starting early, you leave time for any issue to be corrected, so when you are actually ready to start the home buying process your financial profile is in good enough shape for the loan officer to issue a pre-qualification letter.
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