One of the basic steps of purchasing a new home is figuring out how much you are able to spend. Before you can do all the fun parts like searching for and viewing homes, you have to go through some financial steps to get an idea of your price range. In order to do this, you will be seeking a mortgage pre-approval or a mortgage pre-qualification from a bank. While these two terms are similar and seem as if they can be used interchangeably, mortgage pre-approval and pre-qualification are two uniquely different processes. Let us explain:
Mortgage pre-qualification is a casual dialogue between a bank and a potential homebuyer that may be helpful in determining the amount which a buying party can borrow from that bank. As a potential homebuyer, you would need to verbally supply the bank with information regarding your income, assets, and credit history. It is possible to determine pre-qualification with some banks online and it is generally a free service. Pre-qualification allows you to estimate your budget but will not be an accurate representation of the amount for which you could actually be approved.
To put it simply, mortgage pre-approval is a more complex process which yields a more secure and specific outcome. When you seek pre-approval for a mortgage, a bank will need to gather and verify a lot of information about your financial state. They will need documentation of your credit history, your pay statements, tax and bank information, and other financial history- similar to the documents they would be collecting upon actually providing you with a home loan. Once they process all of your information, they will provide you with a written pre-approval statement clarifying the amount from them which you can borrow. This document does not absolutely guarantee you the amount pre-approved, but it does give you a relatively secure price-range to set with your Realtor. In addition, having a mortgage pre-approval statement will expedite the process if you eventually decide to request a loan from that bank. Some home sellers will only accept offers from buying candidates who have been pre-approved for a mortgage.
While the pre-approval process is more complex than that of a mortgage pre-qualification, we highly recommend investing in the more secure method: pre-approval. This will give you a leg-up on other homebuyers and make you a more reliable component in the home-buying process. Once you’re pre-approved for a mortgage, you can enjoy searching for your new home!
We hope this post helped to clarify the often confusing differences between these two pre-mortgage processes in buying a home. If you have any more questions about this topic or would like to add to this conversation, please let us know in the comments or feel free to contact us.
Here are some additional resources we think you'll find helpful:
What's the best home loan for me? by Ferris Property Group
4 important mortgage documents buyers must sign by Bill Gassett
The 10 commandments of buying a home by Mike Bell for Lighter Side of Real Estate