Want to make a good first impression when you're shopping for a home? Two types of documents can help you do that: Mortgage pre-approval and mortgage pre-qualification.
Each one provides sellers and lenders with important information about your financial situation -- namely, how much you can afford to borrow and what you can afford to pay each month on a mortgage. These documents help them better guide you through the home-buying process.
Here is a quick overview of the two processes so you can decide which one you should get.
A pre-approval involves the same steps as a complete mortgage application and is therefore a very thorough review of your ability to buy a home. Because of this, buyers obtain pre-approvals to demonstrate to sellers that they can afford the home and are serious home buyers.
How to get pre-approved: To get a pre-approval, you'll basically need to go through the entire mortgage application process, including income and employment verification, as well as a credit check. The only major difference between a pre-approval and a completed mortgage application is that with a pre-approval, you haven't decided on a particular property yet.
Upon obtaining a pre-approval, you'll receive a letter stating that the bank is prepared to give you a loan for a certain amount. In addition to assuring you that credit and income won't be an issue later on, a pre-approval lets sellers know that you're a serious buyer and won't just make an offer and disappear.
Benefits of pre-approval:
- You'll know exactly what you can afford.
- It eliminates surprises after you choose a home.
- Sellers will take your offers more seriously.
A pre-qualification is a less thorough process during which a lender will examine a prospective borrower's income and expenses in order to determine how much they could potentially borrow to buy a home. Usually, a pre-qualification is based on information obtained verbally (not verified) from a borrower, and it may or may not include a credit check.
Getting pre-qualified: Usually, a pre-qualification can be done online or in a few minutes by visiting a lender in person. It's not a very thorough process, and little or no documentation is necessary.
Benefits of pre-qualification:
- Tells you how much house you can afford.
- Helps you determine your budget.
- The information in a pre-qualification is unverified, so it carries little weight with sellers.
- It's not a guarantee of your ability to obtain a loan.
The bottom line
If you want to be considered a serious buyer, pre-approval is almost always the way to go. Not only does it help during the shopping process, but it can also save time when you're trying to close on a home, as a lot of the application (credit check, income verification, etc.) will be complete already.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.