Before diving into the housing market, you usually have a general idea of where you want to live, how you want to live, and how much home you can afford. But that’s only the beginning!
You’ll most likely hear mortgage pre-approval vs. pre-qualification used heavily during your home buying journey. These are two key steps in the mortgage application process.
These terms may sound similar, and they’re often used interchangeably, but there are important differences that you as a homebuyer should understand. Here’s what you need to know about the differences between mortgage pre-approval vs. pre-qualification.
WHAT IS A PRE-APPROVAL?
A pre-approval is the result of a thorough examination of your credit history and the actual financial documentation you provide. It’s an underwritten estimate of how much home you can afford and how much debt you can assume.
Pre-approvals are typically stronger than pre-qualifications because it enables your lender to more accurately assess your qualifications and the loan payment you could cover. Once it’s determined how much they’re willing to loan you, you’ll receive a pre-approval letter indicating the amount.
Not only does a pre-approval save you time, but it’s also a great bargaining chip when you’re buying in a competitive market. Both real estate agents and sellers prefer working with pre-approved buyers because it shows you’re committed to buying a home.
WHAT IS PRE-QUALIFICATION?
A pre-qualification is a “best guess” of what you can most likely afford. This guess is based on what you verbally tell your lender about your income and, even if you’re 100% accurate, it still doesn’t paint the full picture of your current financial situation.
This information is taken into account and then a lender applies it against their own loan requirements and determines if you qualify and for how much. Think of a mortgage pre-qualification as an estimate to have if you’re just casually shopping. Don’t consider it a guaranteed amount until you have gone through the extended pre-approval process.
WHICH ONE IS FOR YOU?
The option that is right for you depends on where you are in your home search.
If you want the most accurate depiction of what you can qualify for, or you’re about to start searching for a home, a mortgage pre-approval letter is the more accurate of the two. Since pre-approvals require documentation, they’re typically a better indicator of whether you’ll qualify for a home loan or not and for how much.
Getting pre-approved could actually help you stand out from other buyers. If multiple offers are on the table, sellers will often choose a pre-approved buyer. This indicates you’re more likely to be approved for financing (and ultimately follow through with the deal).
On the other hand, maybe you’re just starting your home search and want some direction. A pre-qualification is worthwhile if you’re far out from the home search and are just getting an idea of what mortgage options you may have.
KNOW YOUR FINANCIAL BACKSTORY
Before deciding between mortgage pre-approval vs. pre-qualification, you’ll want to start collecting some information. Your lender will want proof of your income, liquid assets, and debts.
More than just your annual pay, income can also include (if you have documentation) freelance income, income from rental properties, alimony, child support, disability payments, retirement benefits, and investment returns.
Liquid assets are anything that can be turned into cash quickly, such as checking or savings accounts. Since you can cash out stocks, money market funds, and other investments fairly quickly, they’re also considered liquid assets.
Generally, this is how much you owe in recurring debt, such as car payments and student loans. Fluctuating debt like credit card bills is not as important, but your lender will want to know how much credit is available to help determine how likely it is that you’ll go deeper into debt.
DOCUMENTS TO HAVE READY
Besides the big-picture details mentioned above, you will also be asked for supporting paperwork. Depending on your financial situation and your lender’s approach, you may have to provide additional documentation. The following list is a good starting point for most prospective homebuyers:
- Social Security number: You may need to have a physical copy of your Social Security card on hand.
- W-2 forms: You will need to have proof of income for the past two years. If you are self-employed, consider documenting income history for the past three years.
- 1040 Federal Tax Returns: You should include tax returns for the last two years.
- Recent pay stubs: This should include pay stubs for the previous two months covering at least 30 days of YTD income.
- Government-issued identification: This includes a copy of driver’s license, U.S. passport, or Military I.D.
- Proof of down payment: You should have proof of down payment or a “gift letter” if a family member is giving you some money toward the down payment amount.
- Bank statements: Bank statements show checking, savings, money markets, and other liquid assets such as stocks, IRAs, and mutual funds.
- Credit history: You’ll sign a release form allowing your lender to pull your credit report. You may want to make sure your credit report is in good order before applying!
LET US HELP YOU DECIDE ON MORTGAGE PRE-APPROVAL VS. PRE-QUALIFICATION
Both mortgage pre-approval vs. pre-qualification can help you gauge your mortgage options, as well as guide your search for your new home. If you’re looking for a competitive edge or a more accurate depiction of what you can qualify for, opt for mortgage pre-approval vs. pre-qualification.
If you’re still unsure what the best move is in your specific situation, talk to our Mortgage Lenders at Wasatch Peaks Credit Union so they can point you in the right direction. Read below for a list of top questions to get you started!