Pre-Qualified Vs. Pre-Approved: Which Do You Need To Buy A Home?
You’ve finally found your “unicorn” property, and you’ve already begun daydreaming about what your family’s life will be like once you’ve settled into your stunning new home.
You call your agent to make an offer before your dream home can slip away, but are left scrambling to get a pre-approval letter from your preferred lender as more prospective buyers begin bidding on your home.
Sounds like every buyer's worst nightmare, right?
The bad news is that this scenario plays out nearly every day.
The good news is that there’s a simple way to avoid this competitive market fiasco altogether.
With a pre-qualification or pre-approval letter, you can show potential sellers that you have the funds necessary to buy a home, and increase your chances of landing the property of your dreams.
But first, it’s important to remember that pre-qualification and pre-approval are not the same things.
In fact, both forms of financial verification can have very different implications for the success of your offer, and ultimately your ability to get a home loan.
Here’s what you need to know to ensure that your application process goes smoothly and effectively…
What is a Pre-Qualification letter?
In simple terms, a pre-qualification is a document that shows lenders you may have the financial means to buy a home.
However, a pre-qualification letter does NOT count as a guarantee that you’ve been approved for a mortgage. Instead, it provides a small glimpse into your financial situation, without requiring you to complete an approval process that may affect your credit score.
So, why is a pre-qualification letter a good idea, if it can’t actually be used to help you buy a home?
Well, for first-time home buyers who are ready to start looking, but can’t commit to buying right away, a pre-qualification letter is a great way to get an idea of what you can afford to spend on a mortgage, so you can start looking at homes in your price range.
Or if you’re just curious to see how much of a mortgage you could be approved for in the future, a pre-qualification can provide you with this insight without needing verified credit reports.
Pros of a Pre-Qualification Letter…
- Easy and fast to obtain
- Relies only on self-reported financial information, instead of credit reports
- Doesn’t require you to provide sensitive personal information
- Can show you what prince range you may be approved for
- Won’t hurt your credit score
Cons of a Pre-Qualification Letter…
- Can’t be used to buy a home
- May leave out critical information that impacts your likelihood of being approved for a mortgage
- Is not considered to be 100% accurate
What is a Pre-Approval Letter?
Whereas a pre-qualification letter only shows you what type of mortgage you might be approved for when it's time to buy a home, a pre-approval letter is an official document that shows sellers exactly how much you’ve been approved for to purchase their property.
This means that once you’ve found a home you’re ready to bid on, a pre-approval letter is a golden ticket that allows you to back up what you’re offering.
Most importantly, a pre-approval letter is a comprehensive dive into your financial situation, which will show you everything from the price range you can afford to your potential interest rates.
Of course, the intensive nature of getting a pre-approval letter requires an extensive verification of your credit score and income, which can cause the process to take significantly longer than a pre-qualification letter, and may impact your credit score.
Pros of a Pre-Approval Letter…
- Gives you clear insight into your mortgage options, interest rates, and more
- Can be used when putting an offer in on a home
- Allows lenders to calculate your debt-to-income ratio, which can help you determine financial goals
- Streamlines the home buying process and increases your chances of getting a home you love
Cons of a Pre-Approval Letter…
- Will pull all existing credit reports, potentially lowering your score
- Requires documentation like pay stubs, W2s, and tax return statements
- Can be a time-consuming process
Which one do I need?
When you’re ready to buy a home, a pre-approval letter is a necessary part of the buying process.
By getting pre-approved, you’ll know exactly what to look for in your price range and can confidently make offers on the spot.
However, if you’re simply beginning to weigh the possibility of buying a home, a pre-qualification letter will give a good starting point to examine your financial situation, so you can work towards your goals.
How does the application process work?
While the process for getting a pre-qualification letter requires you to enter only basic information and takes just a few minutes, the application process for a pre-approval letter relies on 3 main factors.
First, the lender will pull your credit history and verify any negative points affecting your score. This allows them accurately calculate your debt-to-income ratio and create an estimate for how much of a home loan you can be approved for.
After an initial review, your lender may require you to produce documentation that verifies your income or important financial information. This means you’ll need to have recent pay stubs, W2s, 1099s, and tax returns on hand to ensure that your application can be processed quickly.
Lastly, you’ll need to verify how much money you’ll be putting towards the down payment on your home. While mortgage interest rates can vary greatly, putting a sizable down payment down will reduce the overall rate of your home loan. However, there are many loan options available for buyers whose financial situation does not lend itself to a large down payment.
Ready to get approved?
Whether you’re interested in getting a pre-qualification or pre-approval letter, working with the right lender can eliminate wasted time and help you get the most out of your mortgage loan fast.
First Western Trust is an industry leader in the mortgage lending space, specializing in helping buyers from all backgrounds find the support they need to bring their home ownership dreams to life.
Contact our Highly Motivated Vercellino team today by calling (480)-800-8387 to start your application process today.