What's the difference between pre-qualification and pre-approval?
By RealtyCrunch Inc•April, 18th 2020
While the two terms are often used interchangeably, there are important differences that you should be aware of when looking to acquire financing.
What is pre-qualification?
Pre-qualification is one of the first steps in obtaining financing. It is a good first step because it will give you a quick estimate of your price range from the perspective of the lender.
To get pre-qualified, your lender will ask you to submit information about your income, expenses, as well as your assets and liabilities. The lender will do the necessary calculations and provide you with a letter stating how much loan you'll likely qualify for based on the data you provided.
Many real estate agents like to see that you have gotten pre-qualified before they will work with you because it shows you're serious enough to have your financial situation evaluated by a professional.
What is pre-approval?
Pre-approval is a more rigorous process which involves filling out a loan application and substantiating all of your income and expenses. It will involve everything from providing pay stubs, bank statements and getting signed letters explaining anything glaring in the financial documents used to substantiate your credit worthiness.
When you get a pre-approval, you will receive a conditional letter from the lender stating the exact loan amount. While it is not necessary to get pre-approval, there are many great reasons to do it.
What paperwork is required to get pre-approval?
Pay stubs for the past 30 days – YTD income
2 years of fed tax returns
2 years of W2 forms from employer
60 days/quarterly statement of all assets (checkings/savings/CDs/IRAs/stocks/bonds)
What happens when buyers don’t start with a pre-approval?
They run the risk on loosing the home to another qualified buyer, puts the deal in jeopardy
Why is it a good idea to get pre-approved?
Stand Out: The pre-approval helps you stand out from other buyers in competitive market because it shows you are serious. You've already gone through the most rigorous and arduous portion of the home buying experience. (For example, if two parties both offer asking, the seller will likely choose the buyer with pre-approval because you're more likely to close since your loan is already in place.)
Save Time: When you have a pre-qualification letter in hand, you focus your search on homes below the price for which you can get a loan. You can also close more quickly with all of the loan paperwork out of the way.
Less Stress: There are so many unknowns in the home buying process, from whether or not the seller will accept your offer, to whether the home will pass inspection and have clear title. Getting approved for the loan is often a cumbersome process, so having that completed when there is no house or contract on the line will be less stressful.
Negotiation Power: with financing less of a risk for the seller, you can negotiate better on price, as well as other details and allowances that often don't come up for negotiation when it is unknown whether or not the buyer will be approved for the required loan amount.
How long does a pre approval take?
Typically 1-3 business days
How long is a pre approval valid for ?
The pre-approval is normally valid for 30 – 90 days on a conditional approval
There are some events that can change the approval such as if you change jobs, rack up more debt, eat into your savings etc.
Mistakes to avoid after being pre-approved
Once you are pre-approved, you don't want to jeopardize your loan. Lenders will do a second check to clear you for closing, so you don't want to risk any hiccups when you've gone through all the trouble to get ahead of the game.
Applying for a new credit line will impact your credit score
Making major purchases: If you buy certain items like furniture or appliances, lender will need to factor it in your debt-to-income ratio if you do it on credit, or if you buy cash, it could impact your cash reserves, which is also a componet of your credit worthiness
Paying off all your debt will impact your cash reserves and can result in a closed account which can impact the length of your credit history and therefore your credit score.
Co-Signing Loans: it's great that you want to help someone with a purchase and you might not be responsible for the debt, but in the eyes of the bank, you could end up being responsible
Changing Jobs: lenders will need to verify the employment and want to see 1-2 paystubs which can delay the settlement
Ignoring lenders calls or communication: provide as much detail as possible to help expedite the deal
Falling behind on your bills: pre-approval is a snapshot in time of your finances and you want to make sure it stays as close to that picture as possible
Loosing track of deposits: making sure you track every activity that happens within your account - bonuses, cashing in CDs, etc. Keep a paper trail of everything.
Forgetting the sellers concessions: you need to inform the lender so they can factored into the loan approval