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Pre-qualified and pre-approval each have their place in the home-buying process. What’s the difference between the two? Do you really need both? Read on to learn more.
If you’re considering buying a home, people may tell you that you need to be “pre-qualified” or “pre-approved.” These terms relate to your mortgage and are two distinct steps in the loan process. Let’s explore what these two words mean, why they matter and common misconceptions about each process.
What Does It Mean to Be Pre-Qualified?
Being pre-qualified means a lender has assessed your general financial picture and, as a result, has given you an idea of how much of a mortgage you could potentially qualify for. The key word here is “idea.” A pre-qualification is a ballpark estimate primarily based on self-reported financial information.
For example, the lender will ask you about your income but typically won’t ask for pay stubs or your W-2 form. They may also do a soft credit check that won’t affect your credit score. Pre-qualification processes vary by lender and are often done over the phone or online.
Why Get Pre-Qualified?
Pre-qualification is a relatively informal step but can be important, especially at the early stage of your home search. It’s particularly beneficial for first-time homebuyers, as it gives you a clearer picture of what you can afford and helps set realistic expectations. A pre-qualification can help you:
- Get an informed estimate of how much you may be able to borrow
- Give you insights into your potential home budget
- Understand your possible mortgage options
What Does It Mean to Be Pre-Approved?
A pre-approval is a contingent approval from your lender that you'll receive a loan for a certain amount. It's a preliminary assessment of your financial situation, typically done before you're actively shopping for a home. Think of it as a green light from your lender, indicating that they’re likely to approve your loan as long as the home meets their requirements and your financial circumstances remain the same.
The Key Differences Between Pre-Qualification and Pre-Approval
While a pre-qualification is an excellent starting point to understand your budget and where you stand regarding potential financing, it’s important to follow up with a pre-approval. The difference is that a pre-approval takes things a step further by providing a more accurate assessment of your borrowing power.
Getting a pre-approval involves the following:
- Completing your lender’s official pre-approval application
- Submitting recent pay stubs, tax returns, bank statements and other financial records
- Undergoing a hard credit report and credit score inquiry
- Verifying your financial information and creditworthiness
Once all documents are submitted and information is verified, you’ll receive a pre-approval stating the loan amount you qualify for.
Which Option Should You Pursue?
Whether you should get a pre-qualification or pre-approval really depends on where you are in your home-buying journey.
When Pre-Qualification Is Sufficient
Starting to think about buying a home? Wondering if you’re financially prepared? Trying to determine your possible loan options? Getting pre-qualified can give you a ballpark estimate of your potential borrowing power based on the financial information you provide. It’s usually a quick and straightforward process that uncovers valuable insights into your budget.
When Pre-Approval is Necessary
Getting a pre-approval is a smart move if you're actively searching for a home and want to be ready to make an offer. It involves a more detailed review of your financial situation. Being pre-approved gives you a more accurate view of your numbers, allowing you to submit an offer with increased confidence. Plus, it shows sellers you are a qualified and credible buyer.
Some lenders, like Pennymac, will allow you to lock your interest rate upon pre-approval. With Pennymac Lock & Shop, you can lock your interest rate before you get into a contract with a seller, protecting yourself from future rate increases. This could save you thousands of dollars in the lifetime cost of your new mortgage. And if rates go down after locking, you can reduce to the lower rate.*
Common Misunderstandings
Let’s clear up some common myths and misunderstandings surrounding pre-qualifications and pre-approvals so you know what to expect as you embark on your home search.
Pre-Approvals and Pre-Qualifications Are Synonymous
As discussed above, both pre-approvals and pre-qualifications relate to home loans but mean different things. A mortgage pre-qualification is a rough estimate of how much you could borrow. A pre-approval is a contingent approval of a specific loan amount.
A Mortgage Is Guaranteed
Pre-approval and pre-qualification offer no guarantees that your mortgage will be approved. A pre-qualification is a preliminary loan estimate based on information that has been unverified by your lender. While a pre-approval is more official, it’s conditional. A mortgage may ultimately not be approved for a variety of reasons, such as:
- If the home inspection reveals serious issues, the lender may be hesitant to finance the entire loan amount
- Underwriting problems, such as discrepancies in your financial information
- If the appraisal comes in lower than the purchase price
- Significant changes to your financial situation
Your mortgage is actually not completely finalized until closing. This is the day you pay your closing costs and down payment, sign all your paperwork and get the keys to your new home.
A Pre-Approval Is the Same as a Conditional Approval
While a pre-approval is a provisional approval for a certain loan amount, it is not the same as a conditional approval. Pre-approval occurs early in the mortgage process, before you have located a specific home you wish to buy.
Conditional approval comes after you’ve signed a contract to purchase a home. It’s closer to the final loan approval. However, the underwriter can still deny the loan if the conditions aren't met or if your financial situation changes.
All Lenders Follow the Same Process
While there are general similarities in how lenders manage pre-qualifications and pre-approvals, there may be variations.
- Required documentation may be more or less extensive
- Some lenders may perform a soft credit inquiry for a pre-qualification, while others may not check credit at all
- Lenders may use the terms “pre-qualification” and “pre-approval” interchangeably. It’s essential to understand exactly what you’re receiving when working with your lender.
Pre-Qualification and Pre-Approvals Will Impact Your Credit Long-Term
A pre-qualification will not impact your credit score since it does not require a hard credit check. A pre-approval will require a hard credit inquiry, which may temporarily lower your credit score by five points or less. As long as you pay bills on time and keep your credit utilization rate low, your score will likely increase within a few months.
Pre-Qualification vs. Pre-Approval FAQs
Have more questions about mortgage pre-qualification and pre-approvals? Here are some frequently asked questions to help you prepare for your next home-buying steps.
What Documents Are Required for a Pre-Qualification vs. a Pre-Approval?
Pre-qualification is an informal process where lenders typically accept self-reported financial information. They may ask you to provide an overview of your income, debts and assets, which can often be done verbally or through a simple form. No official documents are required, but having this information handy can help you give more accurate estimates.
A pre-approval is a more formal process and requires submitting official documents to verify your finances, creditworthiness and debt. You’ll need:
- Recent pay stubs
- Bank statements
- Tax returns
- Statements for additional assets such as stocks, bonds, IRAs and 401(s)
In addition, your lender will conduct a hard credit inquiry.
How Long Does It Take To Get Pre-Qualified vs. Pre-Approved?
Pre-qualification is usually a quick process, often completed in a matter of days or even hours, through an in-person meeting, phone call or online session with a lender. Pre-approval, however, involves a more thorough review of your financial situation and credit history, which naturally takes longer. To expedite your pre-approval, gather all necessary documentation beforehand.
Find Out Your Mortgage Borrowing Power
If you’d like a clearer idea of how much money you may be able to borrow on a home loan, check out the Pennymac mortgage calculator. And, if you have other questions about how to get started finding the right home for you or getting a Pennymac Pre-Approval, talk to a Pennymac Loan Expert today!
*Lock & Shop: Lock & Shop Program allows consumers with a purchase mortgage Pre-Approval from Pennymac to lock a rate prior to locating a property. The program requires a non-refundable fee of $595 due at the time of the rate lock. Consumers with a purchase mortgage Pre-Approval from Pennymac must meet appropriate underwriting conditions to obtain a mortgage loan. Consumers may choose between a 60-day, 75-day or 90-day lock period. Consumers must initiate a mortgage loan application for a specific property and be under purchase contract for the property at least 30 days prior to lock expiration in order to extend the locked rate. All rate lock extensions are subject to Pennymac’s standard rate lock extension fees. After the rate lock and subject to favorable market conditions, consumers may be eligible for a one-time reduction in rate once the loan application for a specific property has been initiated (0.50 % maximum reduction in interest rate allowed). Eligible loan products are Conventional Fixed, Conventional ARM, FHA Fixed and VA Fixed. Program excludes Jumbo, refinance, third-party and in-process loans. Program subject to termination in Pennymac’s sole discretion and without notice.
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