When you embark on your home search, you'll need to know what you can afford – that means knowing how much of a mortgage loan a lender is willing to give you. This isn't something you can guess. Pre-qualification gives you a better idea of your budget, and pre-approval for your loan gives you several advantages as a homebuyer.
1. Know Your Spending Power
If the terms mortgage pre-qualification and mortgage pre-approval seem confusingly similar, that is because they are. Many mortgage lenders use them interchangeably. There are some essential differences, but both help you narrow down your price range as you start house-hunting:
- Mortgage pre-qualification: This mortgage loan estimate is provided to you by a lender with minimal financial information on your part. The basic information you provide allows the bank to give you a ballpark figure for what you can afford based on your salary and employment status.
- Mortgage pre-approval: This mortgage loan estimate is much more specific. A lender will take a deeper dive into your financial situation. They'll run a credit check and closely review your credit report. They'll want to see pay stubs, tax returns, bank statements, credit card and student loan debt and payment history. After this in-depth review, your lender will give you a clear idea of how much of a mortgage loan they are willing to extend to you.
The pre-qualification process is simple, while the pre-approval process can be tedious. But there are serious advantages to borrowers who dig up all of that paperwork.
Consider also: 3 Ways to Improve Your Credit Score
2. Show Your Creditworthiness
Being pre-approved for a home tells sellers that you are a serious buyer. You're not just pre-qualified for a ballpark figure; you've met with a loan officer, delivered all of the financial information and received mortgage pre-approval. Pre-approval tells sellers that your deal is less likely to fall through. In fact, some sellers require a mortgage pre-approval letter before they'll entertain your offer.
The pre-approval letter also boosts your realtor's confidence. A real estate agent wants to know a potential homeowner is also in the position to be a well-qualified borrower.
Consider also: Here's Who Should Invest in Real Estate
3. Secure a Lower Interest Rate
Once you've gathered all of that financial information, it is a good idea to get a pre-approval letter from several lenders to find out how much of a mortgage loan each is willing to give and what mortgage options and interest rates they may offer.
While interest rates are set by the Federal Reserve, not all banks charge the same mortgage rates. Mortgage interest rates offered by lenders may vary based on factors such as bank size, how much risk they are willing to take and their overhead cost.
Shopping around for mortgage loans is smart and can save you money. The pre-approval does trigger a hard credit check, so seek out your pre-approvals around the same time. There is a 45-day window in which those credit checks will only be counted as one inquiry, which saves you from a credit score ding.
Consider also: What Happens After an Underwriter Approves a Home Loan?
4. Close the Home Loan Faster
The home-buying process goes faster when the seller has confidence in your creditworthiness and the lender has a detailed picture of you as a borrower. Both of these benefits of pre-approval expedite the home loan process.
Once you've found your potential new home, you'll choose your lender, determine your down payment and get on with the mortgage application. From there, you'll need to have the real estate appraised to make sure it supports the loan amount the bank pre-approved. By already being pre-qualified and pre-approved, you've moved the mortgage process along so those next steps can happen.
5. Get Ahead in a Competitive Market
All of the benefits above point to one of the most significant advantages of pre-qualifying and receiving pre-approval for a mortgage loan: you become a well-qualified home buyer. The seller of your dream home knows you know your budget, have a lender secured and will likely have a more streamlined mortgage process and faster closing. It puts you at the top of the list as a home buyer.
In today's competitive housing market, especially if you are a first-time homebuyer, you want to be the strongest contender you can be. The pre-approval process helps you secure that position and get on the road to homeownership.
Consider also: Step-by-Step Real Estate Transaction