When you want to make an offer on a house, chances are the seller will want to understand whether you are pre-approved or pre-qualified for a loan. What difference does it make? Our San Clemente Realtors say it depends on you that ask. We are going to explain.
What’s the difference?
Many say that pre-qualification is the preliminary step in the mortgage process, where a lender runs your credit and talks to you about your goals, and pre-approval takes it one step further by requiring verification of your pay stubs and tax returns. But in reality, these two terms are often used interchangeably.
According to the Consumer Finance Protection Bureau, there is often not much difference between pre-approval and pre-qualification. Sometimes, different lenders may even have different definitions for each. Confusing, right?
So which do you need?
The end goal is the same: to give sellers the confidence to accept your offer. So make sure to understand what you’re getting, and find out exactly how your lender defines”pre-approval” or even”pre-qualification.”
Our San Clemente Realtors recommend you speak with your real estate agent to determine which is much more plausible in your market.
Regardless of what your lender calls it, then you are going to get a letter that states they are eager to allow you to borrow a specific amount of money. But keep in mind, neither pre-approval nor pre-qualification (we’ll stick with”pre-approval” from here on out to make it simple) is a guarantee that you’ll get a home loan.
Neither is an offer to lend, a commitment to make a loan or a guarantee of specific rates or terms. The lender may want additional documentation and will have to do an appraisal of your new home before actually expanding a loan.
That means even though you have the pre-approval letter in your hands, this is NOT the time to go buy a new car, stop your job or run up credit card debt. Any big changes to your finances or debt load are very likely to be picked up after you actually apply for a mortgage loan. Most San Clemente Realtors will tell you that lenders aren’t committed.
But on the flip side, neither are you. A lot of buyers think after they’ve got a pre-approval letter they have to use that lender. You don’t.
Why You Need to seek pre-approval
At this stage, you may be thinking that the right time to get pre-approved is right once you find the home you want to purchase. But getting a pre-approval letter at the start of your home search has many advantages.
First, you are going to know upfront what kind of loan you will be approved for. That can help establish your price range. You can also get pre-approval from multiple lenders. Bear in mind, just as the lenders haven’t fully committed to provide you a loan, you don’t have to fully devote to getting your loan from them.
Even if you apply the letter as part of an offer, you are still free to get your loan elsewhere if you find a much better deal. Use the pre-approval procedure to compare rates and lenders. And don’t worry about multiple credit pulls damaging your credit score. Within a two-week interval, all mortgage inquiries just count as a single pull.
You’ll be able to move fast. Pre-approval letters are great for a specific period of time, usually 60 to 90 days. Getting pre-approved early can help you be ready to ship in an offer ASAP because you won’t have to wait a couple of days for the lender to issue you a pre-approval letter.
Pre-approval also signals to everybody else, from real estate agents to sellers, that you are serious. In a competitive market this is particularly important. Let’s say you find a home you love and put in an offer saying you are a pre-qualified. Someone else makes an offer exactly the same home but they are pre-approved.
That offer is likely to be accepted? At a very hot market, sellers may not even want to bother taking a look at your offer until you are pre-approved. If you are looking at bank-owned homes, our San Clemente Real Estate Agents say they need that you submit a pre-approval letter before accepting your offer.
So once you are serious about this whole house-buying thing, how do you get a pre-approval?
What you’ll need
To get pre-approved you’ll likely have to provide the following documentation:
- Your W-2 from the past two years
- Your pay stubs for the past 3 months
- Your tax yields from the past two years
- Your checking or savings bank statements for the past three months (this will likely show your down payment funds as well)
- Statements for all your other assets (stocks, bonds, retirement accounts) for the last two months
- The name and phone number of your landlord (if you are renting) or your current mortgage documents
- Your divorce decree, if applicable
If you are self-employed: Your business tax returns for the past two years in addition to a year-to-date profit-and-loss statement and year-to-date balance sheet
Your Social Security number and permission to pull a credit report. (Many lenders will pass on a $30 fee to pull your credit.)
You don’t need to wait to gather all of that before checking out the application. As a matter of fact, based on your circumstances and if your credit score is especially stellar, our San Clemente Real Estate Agents say you may not need some of the documentation at this stage, but it’s very good to have an idea of what you will need. Once you’ve given the necessary documentation, a pre-approval letter should be in your hands within 24 to 48 hours.
What if you can’t get pre-approved?
Our San Clemente Real Estate Agents suggest you try and work to improve your credit score, pay down debt and make sure that you pay your bills on time. Assess your credit score for any errors and correct them. Ask your lender what the roadblock was and operate to eliminate it for next time.