As you start out on your home buying journey, you’ll likely hear all sorts of terms thrown around and it can quickly become confusing. When it comes to figuring out how you’re going to finance your new home, there are two key terms you’ll hear: pre-qualified and pre-approved. So what's the difference, is there a difference, is one better than the other, etc? Do you need to be pre-qualified and pre-approved? In this article we’ll break down both terms to help you more clearly understand the process.
What Does it Mean to be Pre-Qualified?
A mortgage pre-qualification is a quick peek into how much house you might be able to afford. It can be done by a lender on the spot and only requires your name, phone number, any assets and debts, your income numbers and a credit check. It's important to know that being pre-qualified does not guarantee that you will actually get the loan, it’s just an estimate of what you might be able to afford.
Getting pre-qualified gives you an idea of how much money you could potentially borrow and will help you narrow down your house hunting to homes that are more in your price range. And in order to find out how much you can actually afford, the next step is to get pre-approved.
What Does it Mean to be Pre-Approved?
Think of mortgage pre-approval as the next, more serious, step in the mortgage loan process. It’s a much more thorough inquiry into your financial situation and history and gives you a clear picture of how much house you can actually afford. For a pre-approval, you will actually submit income and asset documentation which will be reviewed by an underwriter. Then, once a property is identified, the property is underwritten, and final credit documents are reviewed.
And if you’re serious about buying a home, you could just skip the pre-qualification process and go straight to pre-approval. Pre-approval gives you more negotiating power when it comes to making an offer on a home because you’re taken more seriously by home buyers. Pre-approvals usually expire after 60 to 90 days so it's important to act fast if you find a home you want to place an offer on.
While there’s more documentation and work involved in getting pre-approved, it allows you to seriously start your home search, bringing you one step closer to buying the home of your dreams.
So what kind of documentation are we talking about for mortgage pre-approval? It includes documents that provide proof of:
- Credit score
- Employment and income
- Last two years of personal federal tax returns
- Pay stubs from the last 30 days
- W-2s from the past two years
- Last two months worth of bank statements for each account you hold including checking, savings, any retirement accounts, stocks, etc.
If you're curious about what step you should take next, reach out and chat with us. We know how overwhelming this whole process can feel and want you to know you’re not alone. With a little knowledge and guidance, you'll be on your way to realizing your goal of homeownership.