Easily Explain To Me: What's a Mortgage Pre-Approval Versus a Pre-Qualification
Benefits of a Mortgage Pre-Approval
A mortgage pre-approval is the process of confirming an individual’s creditworthiness prior to having a mortgage purchase contract in place. It is the initial process that qualifies an individual for a loan based on the information they have provided – i.e., credit, debt, employment history, and income. It indicates to sellers that you are eligible to obtain financing and acts as a financial security blanket when home shopping.
A pre-approval is your secret weapon if you are house shopping. A pre-approval indicates to the seller your intentions, financial stability, and creditworthiness to purchase the property. It gives you a competitive advantage! It’s like entering the job market with a degree. While not necessary, it does give you the upper hand in some instances.
Documents Required for a Pre-Approval
Getting prepped for your mortgage pre-approval can be a time-sensitive process, that’s why it is best to start early! Once you’re done, you’ve completed most of the heavy lifting required on your part. Here’s what you need to prep:
• Proof of employment
• Proof of financing for the down payment and closing costs
• Information about other assets such as vehicles, rental properties, vacation homes, etc.
• Information about personal debts and financial obligations (i.e., level of debt)
Once your pre-approval has been approved by a lender, you will be provided a pre-approval letter. Pre-approval letters are valid for 60, 90, or even sometimes 120 days depending on the lender, and are subject to continued good credit. This is because an individual’s financial profile can change substantially within this period, and many lenders aren’t willing to risk a prospective borrower dropping off beyond this point.
Once you have been approved, here is what you should be looking for in the pre-approval letter:
• Pre-approved mortgage amount
• Home price – the maximum price you can afford
• Pre-approval expiry date
• Mortgage type – amortization, term, LTV ratio
A mortgage pre-approval does not guarantee interest rates. In your pre-approval letter, the quoted interest rate provided is known as a ‘floating rate.’ Meaning, the rate is variable and will move with the market. You are eligible to lock in an interest rate once your mortgage has been finalized with the lender. This can be beneficial because once you move towards securing a traditional mortgage, you’ll still have time to negotiate interest rates and switch lenders if needed.
Give Me the Pre-Approval Tips…
Getting multiple pre-approvals can damage your credit score. Why? Lenders run a hard credit check prior to approving an applicant. Resultingly, hard inquiries can decrease an individual’s credit score by several points as it indicates a person’s need to obtain financing for debt. This can be a red flag for potential future lenders.
But here’s a tip moving forward. If you apply for financing through multiple mortgage lenders within 14 days or less, it will only show up as one singular hard inquiry on your credit report. Don’t wait multiple weeks to compare financing options, do it all at once!
What is a Mortgage Pre-Qualification?
A mortgage pre-qualification is a step below a pre-approval. A pre-qualification is an estimate of the dollar amount an individual can potentially be approved for by a lender. It is not the most accurate representation, as it does not account for an individual’s credit report. However, a pre-qualification is a good indicator if you are casually shopping around and/or planning to purchase in the future. It gives you the ballpark estimate you could be approved for, and you’ll have peace of mind knowing you can afford a home at a given price.
A mortgage pre-qualification is less tedious than a pre-approval or typical mortgage. You’ll need to supply your Mortgage Broker with information regarding:
• Tax Records
• Proof of Assets
• Basic details about your bank accounts
Okay, But What is the Main Difference?
Let’s simplify it… a mortgage pre-qualification gives you a ballpark dollar amount estimate for what you can afford. It doesn’t really mean much to the seller, it is more beneficial to you, the buyer. A pre-approval is the more prominent option and is the “shiny, flashy” document that sellers are looking for.
Basically, let’s assume pre-approvals and pre-qualifications are like Facebook Marketplace. Assume you are shopping for a dresser. In your mind, you have a general budget in mind for the dollar amount you are willing to spend – this is like your pre-qualification. You browse Facebook Marketplace and barter with a couple of sellers before securing a dresser with the best seller. This is like the pre-approval process – you go back and forth with lenders before deciding on which lender to partner with.
P.S. – a Mortgage Broker can make this process easier.