Pre-qualification and pre-approval can seem a little confusing at first. In simplest terms, pre-qualification is a quick and easy first step toward homeownership, whereas pre-approval is a more thorough and detailed process.
Here’s what you need to know about pre-qualification VS pre-approval for a home loan.
- What’s the difference between pre-qualification VS pre-approval for a home loan?
- Why is it recommended to get pre-approved before shopping for homes?
- What is a Maximum Loan Amount, and why is it important?
- What does it take to get pre-approved for a mortgage?
- Do I have to take multiple hits to my credit score if I want to shop around for different lenders?
- What documents will I need to provide in order to qualify for a home loan?
- How do I know if I should go ahead and get pre-approved, or wait until taking that step?
Pre-Qualification: A great first step toward buying a home
If buying a home is like getting married, then pre-qualification is the “dating phase” in the relationship (whereas pre-approval is sort of like getting engaged).
Pre-qualification is a fancy word that basically just means talking to a mortgage advisor. Think of pre-qualification as a great first step toward buying a home. There are no major commitments or credit checks required at this stage.
During pre-qualification, you’ll consult with your mortgage advisor, they’ll ask you what you’re looking to accomplish as far as owning a home, get a better understanding of your story and how they can help you, and they’ll also ask some basic questions about your finances.
Depending on your conversation, your mortgage advisor may be able to give you a rough estimate of what you may qualify for, along with what your monthly mortgage payments would be.
If you’re working with Hero Homebuyer Programs™ mortgage advisor, they’ll be happy to do the research FOR you to find the best financial benefits, programs, and local grants available to help you save on your home purchase!
After getting pre-qualified, you can decide whether you want to move forward with the pre-approval.
Why should I get pre-approved BEFORE shopping for homes?
Remember that marriage analogy from before? Well shopping for homes without getting pre-approved for a home loan… that’s kind of like trying on wedding dresses before you’ve gotten engaged.
Sure, a lot of people might start house shopping before getting pre-approved, and that’s not the end of the world…
But it is strongly recommended that you get pre-approved BEFORE you start house hunting. (In fact, some realtors won’t even take you out shopping for homes until you get that pre-approval letter in hand.)
Here are the benefits to getting pre-approved for a home loan:
You’ll learn your Maximum Loan Amount (IE how much house you can afford).
Knowing your Maximum Loan Amount helps to set your budget, so you know what price range you’re working with during your home search.
Getting a Pre-Approval Letter helps you stand out as a serious buyer.
When you find a home you love and are ready to make an offer, having that Pre-Approval Letter in hand basically says to the seller, “Hey Seller, I’ve done my homework, I know how much I can afford, so you should take my offer seriously.”
Let’s say you find a home you love and want to pounce on making an offer. If you haven’t already been pre-approved, then that can delay you and prevent you from making an offer. And the longer you wait to put down an offer… the more likely that another buyer is to swoop in on that home.
What does it take to get pre-approved for a home loan?
Pre-approval is a lot more detailed than pre-qualification.
Here’s what’s required to get pre-approved:
- Credit Check
- Loan Application
- Document Collection
Credit Check For Pre-Approval
Your mortgage advisor will need to pull credit and take a look at your report. After pulling credit, your mortgage advisor may go over each item on your credit report with you line-by-line just to make sure that everything is correct.
If there’s any item on your report that isn’t accurate, maybe a debt you’ve already paid off that just hasn’t been taken off your report yet, then you can address that ahead of time (instead of it becoming a problem later on down the road).
What if I want to talk to multiple mortgage advisors? Do I have to take multiple hits to my credit?
The great news is, as long as you stay within a 45-day timeframe, you can have multiple lenders check your credit without taking several hits to your score!
According to the Consumer Financial Protection Bureau, “Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry.”
This means that you have the option to talk to different lenders and submit multiple mortgage applications, without having to take multiple hits to your credit score (as long as those credit checks are all conducted within a 45-day window).
However, this rule only applies if the credit inquiries have to do with the same loan product (IE a home loan).
For example, let’s say you fill out a mortgage application and have your credit pulled by a mortgage lender. Then, a week later, you decide to apply for a credit card.
Even though you’re staying within that 45-day window, both credit checks would impact your score because those are two different financial products (IE a home loan vs. a credit card).
The Pre-Approval Loan Application
Filling out the loan application can be a bit tedious, but your mortgage advisor will prepare you for this process.
And depending on where you live, your mortgage advisor may be able to complete the application WITH you to make this process a little easier.
Here’s some of the information you’ll need to provide when completing your loan application:
- Personal identification & Contact Info
- Employment and/or Self-Employment Details
- Liabilities (such as credit cards, other debts, or leases that you owe)
- Assets & Income Details
- Real Estate Info (if you own any other properties)
- Military Service (if you or your spouse has served)
The Pre-Approval Document Collection
The exact documentation you’ll need to provide can vary greatly depending on your specific situation.
After speaking with your mortgage advisor, they should send over a list of what they need from you, so you know exactly what documents are required to get pre-approved.
There are 4 categories of documentation you may need to provide:
- Proof Of Income
- Asset Statements
- Personal Identification
- Other Documents
NOTE: You will likely NOT need to provide ALL the documents listed below.
This is an EXTENSIVE LIST of documents examples, but the exact list of documents required from you will vary greatly depending on your unique situation.
Proof Of Income Examples (for W2 employees)
- 30 Days Of Paystubs
- 2 Years Of W2s
- Verification Of Employment (VOE) Form
Proof Of Income Examples (for non-W2 employees)
- 2 Years Of Tax Returns
- Profit & Loss Statements
- Balance Sheets
Asset Statements Examples
- Depository Account Statements
- Retirement Accounts
- Investment Accounts
- Business Assets
- Gift Letter (if using gift funds)
Personal Identification Examples
- Photo ID
- Driver’s License
- Social Security Card
- Individual Taxpayer Identification (ITIN)
Other Documents Examples
- Social Security Administrator’s award letter (if receiving Social Security benefits)
- Divorce decree
- Bankruptcy documentation
- Proof Of Rent Payments/Copy Of Lease
- Business License
- Copy Of Ratified Sales Contract
- Child Support / Alimony Documentation
After pulling credit, receiving your loan application, and collecting the required documents, your mortgage advisor will then be able to write up a Pre-Approval Letter which includes your Maximum Loan Amount.
I’ve been pre-qualified, should I go ahead and move forward with pre-approval?
Some people get pre-qualified and then move right along toward pre-approval, while others get pre-qualified and then decide to wait before taking the next step.
That decision is really up to you and dependent on your specific situation.
Your unique timeline is one of the many factors that come into play when getting you a great deal on your home purchase.
Knowing when to make certain moves towards homeownership is an important – and oftentimes difficult – decision to make, but you don’t have to go it alone.
Talking to a trusted mortgage advisor can help you make more informed decisions about your home buying timeline, helping you understand when it’s in your best interest to wait, or to go ahead and move forward toward owning a home.