While these terms may seem interchangeable, they certainly are not! If you’re looking to buy a house and your purchase is dependent upon a home loan, one of the first steps in the process is knowing what you can afford. Not what you think you can afford, but what the bank is actually willing to lend you based on various factors like debt-to-income ratio, credit score, and work history. If you’re serious about buying a home, you’ll need to be pre-approved for a home loan.
How They Differ
Think of pre-qualification as a preliminary indicator of your financial readiness to start the journey of homeownership. You describe your income, debt, assets, and credit to the lender and they tell you, based on the information you provided, what they can lend you. Some lenders may even perform a credit check during pre-qualification.
The major difference between the two is that, with a pre-approval, the lender isn’t just going off of what you reported. The lender verifies your income and expenses, assets, debt, credit, and employment. If this sounds like a lot, don’t fret! You want them to do this, diligently, so there are no surprises later.
In short, a pre-qualification says this is what we can lend you based on preliminary data you’ve provided, while a pre-approval says we’ve done our research and here’s the type of loan, amount, and terms we’re offering you.
Sellers, and their real estate agents, want to work with buyers who they believe will make it to the closing table and leave with the keys. A pre-qualification does not provide this level of confidence. A pre-approval, however, does. With your pre-approval letter from the lender, you’re now ready to look for homes and – once you’ve found the right home for you, submit an offer. Offers submitted without a pre-approval letter are not taken seriously in real estate transactions.
The pre-approval also protects you as a buyer. It ensures you begin your search with homes in your price range. Imagine thinking you can obtain a home loan for $500K and looking at homes in that price range, only to later find that you’re pre-approved for $400K. Ouch! Getting pre-approved prior to starting your home search, ensures this does not happen to you.
It’s important to note that even a pre-approval doesn’t guarantee your loan. After obtaining a pre-approval, you’ll want to make sure not to take on any new debt or have any changes in employment. Lay low! A colleague of mine told me about a client who found out the morning of closing that he and his wife would not be able to complete their home purchase because he had just bought a boat to park at the dock of the home they were acquiring. Epic fail. Now they had a boat with no home. To make matters worse, his wife didn’t know about the boat purchase until closing day. I’ve heard similar horror stories with buyers going out and charging furniture for their new home on credit cards a few days prior to closing and, therefore, being unable to close the deal.
If you’re looking for a lender, leave me a comment. I’ve got a great network to get you pre-approved. It’s also important to have an experienced realtor looking out for your best interest throughout the home buying process. If you’re in Florida or Georgia, I’m your girl! If you’re located elsewhere, I’m happy to put you in touch with a trusted real estate professional in your area.
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