Pre-Approved vs Pre-Qualified - the ins and outs
When it comes to buying a house in a hot property market like Denver, the spoils go to the buyers who are ready to make a strong offer as soon as possible.
Top of that list is confirmation from a lender of how much you can actually borrow, and as such, pay for a property.
There are two ways to do this. Pre-Qualification and Pre-Approval.
Both processes can help estimate the loan amount that you will likely qualify for. This is a huge time saver and reality check for the start of your home search. You’ll be equipped with the knowledge of exactly what properties you can consider for your budget!
They both show that you are a serious contender when submitting your offer to the seller.
They’re often required by sellers to accompany your offer - again to demonstrate your seriousness and ability to get a loan for the property. This again is a huge plus in a competitive market.
There are slight variations between the two processes.
Mortgage Pre-Qualification
Pre-qualification is the most simple of two, and is often seen as the first step in the mortgage process.
Pre-Qualification typically costs you nothing, and can often be done using an online calculator this one one from Guild Mortgage.
You supply an overview of your financial history to your lender. The process doesn’t always require documentation and can be self-reported.
During the pre-qualification process, you will be expected to provide the following information:
Your gross monthly income.
Your total monthly payments (car payments, credit cards minimums, child support payments, student loan payments, any other monthly debts).
According to the Federal Housing Administration (FHA), their pre-qualification essentials include:
Having a steady employment history, covering at least two years.
Consistent or increasing income over the past two years.
Credit report reflecting a good repayment history with creditors.
Any bankruptcy must have been discharged at least two years prior (one year for a Chapter 13), with good credit since the discharge.
Any foreclosure must have been completed at least three years prior, with good credit since the completion of the foreclosure.
Mortgage payment – including taxes, homeowners insurance, mortgage insurance, and HOA dues (if applicable) should be no more than approximately 30% of your total gross monthly income.
Total monthly debt payments should not exceed approximately 45% of total gross income.
In a pre-qualification process, a soft credit inquiry will be done by the lender - but don’t worry, this does not affect your credit score. Find out the difference between a hard and soft credit inquiry (pull) here.
Mortgage Pre-Approval
Mortgage pre-approval is very similar, but goes much deeper into documentation and verification of your income, assets, and debts.
A Mortgage Pre-approval will often require a credit check, which will result in a hard inquiry on your credit report.
Which one should You get, and when?
The answer to this is both, but not necessarily at the same time. It all depends on your circumstances.
If you’re at the early stages of your property search, then I would recommend you get a Pre-Qualified. This way, you have a good idea of the price point you can look at. It will save on a lot of disappointment and prevent you from shopping for a Champaign Lifestyle on a Beer Budget.
When you are narrowing in on the homes you want to make offers on, then it is highly recommended that you get a Mortgage Pre-approval letter. This would be submitted with your offer and show that you are a strong contender for a loan at that offer. This is a MUST HAVE to put you into a strong buying position.
It’s also a good idea to have the loan amount on the letter specifically tailored to the offer you want to make (even if you are approved for more).
Ready to start the process and need help finding a lender? Contact me and I would be happy to refer you to some great lenders for a no-obligation chat about your lending power.