A lot of people use the terms ‘pre-qualified’ and ‘pre-approved’ interchangeably, but there are actually some key differences between the two that every homebuyer should understand!
Getting pre-qualified is the first step in the homebuying process and will give the borrower an idea of how large of a loan they will qualify for. Pre-qualification is quick, usually only taking one to three days, and can be done online or over the phone at no cost. Pre-qualification does not include an in-depth look at the borrower's financial ability to purchase a home or an analysis of their credit report. It is the initial step that allows for the lender and borrower to discuss any goals or needs regarding a mortgage. The lender will explain the various mortgage options and which one would be the best suited for them. Keep in mind, pre-qualification is not a sure thing, which is where pre-approval comes in!
Pre-approval is the second step in the homebuying process and is much more involved than the pre-qualification step. To get pre-approved the borrower must complete an official mortgage application as well as supply the lender with all the necessary documentation to perform an extensive credit and financial background check. If everything goes smoothly the lender will then offer pre-approval of a specified amount, an amount they know the borrower will be able to pay back based on their credit and financial check. The pre-approval process will also give the borrower a better idea of what their interest rate will be. If the borrower is ready to move forward, the lender will provide a conditional commitment in writing for an exact loan amount. This allows borrowers to shop for homes and will also put them at an advantage when dealing with a seller because they're one step closer to getting an actual mortgage.
Knowing the difference between being pre-qualified and pre-approved could help with some confusion during the homebuying process. If you have any questions at all contact one of our experienced loan officers today!