While you might hear the terms pre-qualified and pre-approved interchangeably when you start looking into buying a home, they are, in fact, two very different options. Knowing that difference could save you from any potential legal troubles down the road.
What does it mean to be pre-qualified?
Pre-qualified is generally the first step when considering buying a home. You can easily call a variety of mortgage providers and give them basic information about your income situation and they will provide you with a ballpark figure of the amount you qualify for. This allows you to rule out homes that don’t fall within that price range. It’s not a commitment that they’ll provide you with a mortgage, just an estimate of what you might be approved for should a thorough examination of your financial situation check out.
What does it mean to be pre-approved?
Pre-approved is an important step if you want to have a leg up as a buyer. Since some buyers shop around after only being pre-qualified, being pre-approved tells the seller that you are ready to go with your offer and that there will be zero issues for you to secure the mortgage on that offer. It requires filling out a mortgage application, as well as submitting detailed information about your employment situation and financial history. Your credit report will be analyzed, and your approval will tell you the exact amount you are approved for, so you can stick to looking at houses in that price range.
The big difference?
Reliability. While it’s easy to pre-qualify, there is no guarantee to the seller that you’ll actually be approved for a mortgage for the full amount you offer. This means, if they accept your offer and then you apply for approval and it comes back at a smaller number, the contract will be broken, and legal action can be taken. This is risky for both parties, and it’s easily avoided by being pre-approved ahead of time.
Which one is right for me?
It’s always a great step to begin with pre-qualification, but once you’ve found a lender you are happy with, it’s a good idea to move forward with the pre-approval step if you’re serious about buying sooner rather than later. There may be a fee to fill out the pre-approval application and it only lasts for a window of usually 90 days or less, but if you want a leg up in a hot market, it’s always a good idea to have it before you find your dream home.