Ready to go house shopping!? Hold on for just a second! You want to go into this process with the near-guarantee that you have the funding and finances required. Let’s look at exactly what is meant by the terms Pre-Qualified and Pre-Approved.
Pre-Qualified and Prequalification Explained
Prequalification means the creditor has done a high-level, basic review of your creditworthiness to determine if you are likely to qualify for a loan. You initiate this process when you submit a prequalification application for a home loan, a regular loan, or a credit card. Going beyond prequalification by getting preapproved is a crucial step to showing you're serious about buying a home.
Do Mortgage pre-qualifications hurt your credit?
As long as the mortgage prequalification only asks you to share an estimated credit score, or the lender checks your credit with a “soft pull”, your credit won't be affected. This means that you can get pre-qualified without your credit limits being impacted, and without anything happening to your overall credit score.
Pre-Approved Explained
Being pre-approved means that your application has undergone a more thorough analysis, through a process called "underwriting," and a bank/lender has actually approved a specific loan amount for you. The underwriting process can take anywhere from three to six weeks, which is why you will want to get the process started as soon as possible. Your lender will verify your income, your assets, any debts you have, and the property details in order to issue final approval for your loan. The underwriter is a financial expert who looks at all of those financial elements, and assesses how much risk your lender will be taking on if they decide to give you a loan. When you get pre-approved, you will typically receive a letter that states your approved loan amount.
Come prepared for your house-hunting expedition! A pre-approval letter will impress sellers and real estate agents, because it shows that you are a serious buyer with the financial ability to move forward with a purchase. Without that confidence from the seller, you might be skipped over for someone who did get pre-approved.
Items Needed for Pre-Approval
You generally need five things to ensure your pre-approval.
- Proof of Income - This is generally a W-2 or 1099 wage statement, recent pay stubs, and proof of any other additional income in the last two years.
- Proof of Assets - As a homebuyer, you will need to prove that you have the funds for a down payment, closing costs, and cash reserves.
- Good Credit - Most lenders require a FICO score of 620 to approve lending on a conventional loan. With a credit score of 760 or higher, you typically have access to some of the lowest interest rate loans. And, on the other end, if you have a score of only 580, you may be approved by FHA guidelines to pay as little as 3.5% down payment.
- Employment Verification - Your lender wants to make sure that you have income, and proving employment is typically the top way that they do so. Lenders may call your employer to verify your status and salary. Self-employed buyers need to provide significant additional paperwork about their business and income. Fannie Mae and other lenders outline items like - the location and demand of your service/product, the financial strength of your business, and the ability to continue generating income sufficient enough for the borrower to make mortgage payments.
- Other Documents - The lender will also want some of your other documents to prove citizenship and residency. They will typically want to see your driver’s license, Social Security number, and signature. This information allows the lender to run your credit report.
Can You Look At A House Without Preapproval?
It is possible to look at houses without preapproval. However, if you're serious about buying, it is not recommended. ... A preapproval letter will not only help you get in and tour more properties during the house-hunting journey, but it also tells sellers that you're a reliable home buyer when it's time to begin negotiations. By getting all your ducks (and assets) in a row, you’ve made the effort to show that you’re ready to buy,
Does getting pre-approved cost money?
Prequalification is generally a quick, free process where a bank takes your financial information and lets you know generally what your loan will look like. Preapproval is actually the follow-up process that is much more involved and often costs a bit of money. Sometimes pre-approval is free. However, many lenders will charge an application fee of about $200-$500. Some or all of the fee may be credited back to apply toward your closing costs if you continue the process of receiving your loan with that lender.
Can I make an offer on a house without pre-approval?
You sure can! You can make an offer even if you've never spoken to a mortgage lender. Not being pre-approved might not even hamper your offer if the seller has not received other competing offers... However, your offer is only valid if you actually get approval for a mortgage loan after this. And keep in mind, some sellers or real estate agents may not even show you properties without at least a pre-qualification status. In order to comply with "good faith" rules, if you submit an offer on a property, you will need some way of proving credibility. All of this to say: Yes, you can go into the real estate market without pre-approval, but it is very much advised against.
How long does a pre-approval last?
A Pre-approval generally lasts for 60 to 90 days, but will vary from lender to lender. Several financial factors influenced your pre-approval. So, those same factors will continue to affect how “approved” you remain during the house-hunting process. Your current income, credit history, interest rate — all of these financial factors can change after you get your letter. For this reason, a mortgage preapproval typically lasts for 60 to 90 days.
So, which is better: Pre-qualified or Pre-approved?
A pre-qualification is generally a good indication of creditworthiness and the ability to borrow. A pre-approval, on the other hand, is the definitive proof of you ability as a buyer to purchase the property! It is generally best to start with your pre-qualification to ensure that your credit score is good enough to at least consider moving forward with a loan. Then, assuming everything checks out, the lender will offer pre-approval up to a specified amount. After that, you’re ready to get out there and go house shopping!
The differences between pre-qualified and pre-approved can be subtle, especially when you’re just starting a house search. But, now you know exactly what both of those terms mean. Armed with this knowledge, and hopefully a pre-approval letter, you will be ready to go out there and shop for that perfect new home!
We at WK Real Estate want to be there for you during your home search. If there is anything we can help you with, please don't hesitate to contact us.