When financing a mortgage for a home, there are a few mortgage loan terms that you will need to be familiar with: pre-qualification and pre-approval. Here’s a quick summary of these two terms:
Pre-qualification is typically the first step that you will take with a potential lender. This step is where the lender will gather information from you regarding your income, assets, any debt you may have incurred, payment levels and the amount of down-payment and the sales price of the home. Pre-qualification is a general overview of the application process, and is also when the lender may research your credit scores. The lender will also determine what type of loan for which you are able to qualify. Using all of the above information, the lender will generate an estimated mortgage amount that you will be considered to be “pre-qualified” to assume. There is no commitment by the lender that this will be the actual loan amount, but instead, is a helpful tool to help you narrow the parameters of your home search.
Pre-approval is a more detailed process, and requires that you provide actual financial documentation of your income such as paystubs, W-2s, tax returns and bank statements. The lender will use this documentation, along with confirmation of your employment as well as a credit score check, to make a tentative commitment to loan you the money should you decide to purchase a
home. While this commitment is not binding on your part (you may obtain a loan from a different lender) or a guarantee that you will be approved for the loan (as this is contingent on the title search and the property appraisal among other things), the letter of commitment that you will obtain as a result of the pre-approval process will make you a strong contender as a potential buyer, to both the seller as well as their real-estate agent. Moreover, the actual application process for the mortgage will be much shorter with a pre-approval firmly in hand.
While this is a quick overview of the differences between the pre-qualification and the pre-approval processes, I hope this has shed some light on these mortgage terms. Every transaction is different, and while I am unable to give legal, tax or accounting advice, I look forward to helping you navigate your own process with ease and clarity.