What kind of mortgage you can afford and what kind you can get are important things to know when you begin the home-buying process. You might have a ballpark price range for your next home, but you run the risk of setting your sights too high—or too low—without some additional legwork. Narrow down your range by getting pre-qualification and then pre-approval.
Pre-qualification (sometimes abbreviated as ‘prequal’) is a basic overview of a borrower’s ability to get a loan. You provide all the information, without any kind of paperwork to back it up.
Pre-approval is more in-depth. The lender will look at your bank statements, credit score and other information to demonstrate your financial capability. Neither is a guarantee you’ll get the loan, but a pre-approval is more reliable and more favorably viewed by REALTORS® and potential sellers when you start home shopping.
So why get pre-qualified?
- It’s quick and can be done online or over the phone
- You’ll know if you can afford a mortgage
- It can give you a basic idea of what kind of mortgage you can get
A Good Idea, Not the Final Step
While pre-qualification is relatively easy, don’t rely entirely on that information. Mistakes can be made and discrepancies can and will be found during the pre-approval or the final approval process.
Being pre-approved is not a sure-fire way of obtaining a loan, either. For example, if you are pre-approved one month, but then you take out a loan for a new car next month, you can damage your ability to get a mortgage. You do not want to change careers, spend too much money or take out loans during the home-buying process. If you do, you can hurt your loan eligibility.
While being pre-qualified and pre-approved won’t guarantee you a loan, it’s recommended you do both. At the very least, get pre-approved. Many REALTORS® and sellers won’t consider you as a strong home-buying candidate without a pre-approval letter.
So when you’re looking for a new home to buy, it’s in your best interest to do the following:
- Get pre-qualified
- Get pre-approved
- Shop for a home based on your pre-approval amount
- Apply for the loan
If you follow these steps in order, it can save you a lot of time and aggravation during the mortgage loan and home buying process.