When you’re ready to buy a home, most buyers focus on very specific things like square footage, location, and schools. The mortgage is an afterthought until you find the home you want to buy. In reality, figuring out your financing is one of the first steps in the process.
Without knowing where the financing will come from, it’s hard to know what you can afford. Even worse, some sellers won’t take your offer seriously without some kind of confirmation you can get a mortgage. This is where the discussion about pre-qualification and pre-approval usually comes up.
The two terms may sound similar, but they have two very different functions. Which one is better? It depends on where you’re at in the home-buying process.
You Want to Know How Much You Can Afford
Talking to a lender to get pre-qualified is the first step to take, especially if you don’t know how much you can afford. The lender will ask a few basic questions about your employment and financial status. From that information, they’ll come up with a rough estimate of how big of a home loan you may be able to expect. This is information you can use to determine if now is the right time to buy a home or if you can afford the Naples neighborhood of your dreams.
Prequalification is not a guarantee of a loan. In the home buying process, it’s simply gives you an idea of what price range you can afford. Being prequalified doesn’t tell the seller anything other than you’d like to buy a home. Your pre-qualification letter doesn’t mean you can buy a home. For that, you need to get pre-approved.
You’re Ready to Put in an Offer
Getting pre-approved for a mortgage is much more involved than the prequalification process. It gives you a sense of what to expect when you apply for a mortgage. The lender will request specific documents including tax returns, bank statements, and employment verification. They will also run your credit.
To be clear, being pre-approved doesn’t guarantee that you will get the mortgage when you’re ready to buy. Rather, it shows that you’re likely to be approved for a mortgage and that, as of a specific moment in time, you appear to be a good candidate for loan approval. Your pre-approval letter lets sellers know that you’re a serious buyer who can likely make it to the closing table. In a competitive market, this can help you stand out from other buyers.
Keep These Things in Mind
There are a few things to keep in mind as you go through the mortgage process.
- Don’t worry about being pre-approved until you’re ready to buy. If you just want to know how much you can likely afford, start with pre-qualification.
- Talk to multiple lenders to find the best rate and loan. Every mortgage company offers something a little different. You can and should shop around.
- Don’t make any changes to your income or debt once you’re pre-approved. Keep your job, your credit cards, and your other loans the same and keep paying all your bills on time!
Talk to a lender to get pre-qualified or pre-approved. They can explain the ins and outs of how the process works and what rates they offer. If you don’t have a 20 percent down payment, you will likely find a loan program that works for you.
Once you have a budget and you’re ready to start looking, work with a professional real estate agent who can help you negotiate the deal and help you find the perfect home in your budget. I can help you do both. Let’s talk!