Pre-Approval or Pre-Qualified? What Do I Need?

We highly recommend the first step of the home buying process to be acquiring a pre-approval letter from a lender. This does not bind your as the buyer to using that lender, but it does provide a reasonable estimate as to your affordability and importantly, being pre-approved is attractive to sellers because they have to worry less about the risk of you not being able to acquire financing.

What, then, is getting pre-qualified and why is getting pre-approved different, and better?

Pre-Approved vs Pre-Qualified

We tend to think in three levels when it comes to understanding your affordability:

1. Using an affordability calculator as a very rough base estimate

2. Getting pre-qualified

3. Getting pre-approved

Understanding the amount you can reasonably afford and are comfortable with is a start, but getting a letter form a mortgage lender that says you qualify for that number is even better. Better yet is a letter that is supported by the lender checking your credit and income to verify and actually approve you, subject to some final contingencies, at the level. The latter two is the difference between a pre-approval letter and pre-qualification.

A pre-qualification letter represents a very basic and loose agreement. This is more akin to a lender using a basic affordability calculator their company provides and saying, “ya, probably about here.” Worse yet is the interest rate here is likely a lower rate than you may actually receive once your credit has been reviewed.

A pre-approval letter, on the other hand, carries significant weight. This means the lender has run a full credit report on you and considered your existing debts and income to conduce a more thorough analysis. These rates and mortgage amounts reflect the likely reality. Beyond that, the main differences with a pre-approval are that it is contingent on the buyer meeting certain conditions, but if met, you are close to guaranteed to be able to borrow that loan amount.

We cannot understand the importance of getting pre-approved before seriously looking at and considering making offers on homes. Being pre-approved when you submit an offer makes your offer that much stronger not only because the seller knows ‘you’re good for it’ but you can likely close faster, always an attractive offering alongside your purchase price.

Where to Get Pre-Approved and How to Find a Good Lender

Finding a good lender is often an underplayed step in buying a home. The truth is, while interest rates are generally set by the market, closing costs and credits as well as mortgage products can differ between lenders, so we highly recommend doing your due diligence when choosing your lender.

When looking for a lender, a great starting place is referrals but don’t shy away from asking your real estate agent who their preferred lender is. Other sites such as Zillow will also refer you to local lenders and it’s a good idea to meet with at least three.

When meeting with a lender, get a feel for their personality. Are they quick to respond to your emails and questions? Do they provide in-depth answers? Are they willing to run multiple scenarios for you?

Importantly, be sure to ask for some estimates on mortgage products and payments in addition to closing costs. Importantly, be sure to use the APR when comparing different mortgage products. This is different than the interest rate used to calculate your mortgage payment because it reflects the fees associated with the loan — which can vary by lender.

Questions to ask your lender

Be sure also to leverage the Consumer Financial Protection Bureau to check for complaints and reviews on the lender! A good lender is one who is communicative and transparent. They will be on your side and find creative ways to help you obtain financing in the lowest cost possible to you. On the flip side, lenders who are lazy often provide not only bad advice, but if they make mistakes or drag their feet you risk missing out on closing on the home which could have ramifications (especially if you’re selling an existing home and trying to make the timing work).

AJ JamesComment