People who have never bought a home before might think that once they have been pre-qualified for a mortgage, they may be good to go. Not the case. There is a difference between mortgage pre-qualification and mortgage pre-approval. There is a right way and wrong way to apply for a first time home buyer loan in this day and age. If you have been confused about these two similar-sounding phrases, let’s clear that up now.
Get the facts on mortgage pre-approvals, pre-qualification home loans from credible lenders, banks and credit unions.
What Is Mortgage Pre-Qualification?
Getting pre-qualified is the first step in the mortgage application process. It is pretty simple. You give your banker or lender information about your overall finances, such as debt, income and assets. After this information is evaluated, the lender can provide you with an idea of the size of loan you can get. Pre-qualification can be accomplished either over the phone or online. There is usually no cost. Loan pre-qualification does not include looking at your credit report or looking in detail at your financial documents.
The mortgage pre-qualification process is the time to talk with the lender about your goals or needs related to your mortgage. At this time, the lender can give you a basic snapshot of your loan options and recommend the best one for your situation. For example, he can discuss with you the benefits of getting a 15 year or 30 year mortgage, or choosing a fixed or variable rate. All of these mortgage products are worth considering, but some may be preferable to others based upon your financial situation and life goals.
Mortgage pre-qualification does not take long; it only is based upon the information you supply to your lender. So, the amount of mortgage you are pre-qualified for could change later. It is merely the amount that the lender thinks at this early stage that you can be approved for. That is why being a pre-qualified home buyer is not as important as being a pre-approved buyer who has been more thoroughly checked out by the lender.
What Is Mortgage Pre-Approval?
Getting a mortgage pre-approval is the next step in the process, and is more involved. This is when you will complete the mortgage application, pay an application fee, and give the lender documents that will allow it to do a check of your financial situation, income and credit rating. Usually, you will not have settled on a house yet. From an analysis of this information, the lender can give you a good idea on the specific amount you are approved for. You also should get a concept of the interest rate that you will pay. For a conventional mortgage, you will pay a higher rate if you have a lower credit score. Credit score is not as important with an FHA mortgage rate.
With mortgage pre-approval, you will get a conditional commitment from the lender in writing for a precise loan amount. This will allow you to look for a home up to that price. Having a mortgage-pre-approval letter will give you a leg up on other prospective buyers; sellers will know that you have been approved for a mortgage and that you can close the deal.
It is very helpful to have been both pre-qualified and pre-approved before you start house hunting. Not only do sellers know you can get a mortgage. You also know how much house you can be approved for. This way, you are not wasting your time looking at homes that you cannot afford. Getting pre-approved also allows you to move quickly when you find your dream home. When you make the offer, it is not contingent upon getting financing. This will save you time. In a hot market, you could easily lose out on a house that has multiple offers on it if you do not have financing lined up.
Once you find your dream home, you just need to fill in the house specifics on the application, and that will result in a complete mortgage application.
The last step in the mortgage process is the loan commitment. This is only issued by the lender when you have been approved and the home meets its minimum standards of quality and appraises at or above the proposed sales price. The bank could ask for more information if there is anything wrong with the home, such as the roof, foundation, accessibility or outstanding liens. Your income and credit will be checked one last time before closing, as well. The loan commitment letter is only issued when the bank has made its final decision to lend.
The takeaway in 2021 is that pre-qualification and mortgage pre-approval are very different. Do not assume the lender will give you the loan until you have the loan commitment. Most people do get the loan after being pre-approved, but even then, sometimes problems crop up.
The most common is when the buyer runs up credit cards or loses or quits a job between pre-approval and loan closing. Those issues can cause the loan to fall through, so make every effort to keep your financial situation the same before the loan is closed.