What is pre-qualification?
Pre-qualification is the first step towards securing a loan. Typically, the pre-qualification process is a phone interview with a lender, but some lenders allow you to submit information online. The lender is gathering information about your financial status to make a tentative decision about whether or not they will loan you money. They will ask about your income, current debts, funds available for a down-payment, and run a credit report.
Being prequalified is useful for two reasons. First, it helps you estimate about how much you can borrow to buy a home. Also, the lender will send you a letter that states you are prequalified for a loan. This is useful when making an offer on a home because it lets the seller know that you have a conditional loan agreement.
Being pre-qualified does not mean that you are guaranteed to secure the loan. For example, a change in your financial situation, like additional debts, or loss of income, could make the loan unavailable to you. This is one reason that it is very important not to make any large purchases while you are applying for financing.
What is pre-approval?
To get pre-approved, you must submit a loan application. This is a more time consuming and intensive process, but it is more substantial and carries more weight with home sellers comparing offers than a pre-qualification letter. The lender will review your credit, check employment history, and has verified that your income and credit meet the requirements to secure a loan.
Again, being pre-approved does not mean that you have secured the loan. The lender still needs to appraise the property that you wish to buy. Significant financial changes after pre-approval can still result in being unable to secure the loan.
If you are not already pre-approved, or pre-qualified, your buyer’s agent can recommend lenders and advise you through the process.
