If you were ready to buy a house, would you rather be pre-qualified or pre-approved for a mortgage loan? In everyday usage, the two phrases seem so similar, it’s easy to guess wrong. You want to be pre-approved. Here’s why.
Pre-qualified means that a lender did a cursory review of your finances and stated a general range of what you can borrow. In contrast, pre-approval requires a mortgage application and the lender verifies your assets, debts, income and credit history. This method yields a more accurate estimate of your borrowing power.
Second question: When should you get pre-approved? Answer: Before you select a house. Listed below are 12 reasons why it is important to choose the right process (pre-approval) and the right timing (before you start house-shopping).
- Getting pre-approved takes time and in real estate, timing can be everything. Pre-approved buyers can submit an offer immediately and potentially get the seller’s acceptance before other buyers can become viable competitors.
- A pre-approved buyer can close faster. This is a significant negotiating advantage over other buyers when the seller wants to close ASAP.
- Offers made by pre-approved buyers are more likely to close. Sellers will often accept a lesser price in exchange for the increased chance of a successful closing.
- A firm price range narrows the houses to a more manageable number, allowing buyers to efficiently review the right subset of the housing inventory.
- Agents representing buyers want pre-approvals before showing houses so that the desired price range is clear.
- Buyers without pre-approvals are not taken seriously by sellers and listing agents.
- Pre-approvals provide an estimated mortgage payment and therefore, an important reality check. Buyers have time to consider potential sacrifices and set reasonable expectations about which houses will fit within their budget.
- It reveals if there is a mistake in the buyers’ credit report history, allowing time to get it corrected.
- The pre-approval process may reveal a weak credit history that needs improvement before buying a house.
- Pre-approvals give early notification if buyers will not qualify for the lowest interest rate offered by a lender. Buyers can then decide if they should shop in a lower price range to stay within budget or simply delay the purchase.
- Mortgage pre-approvals give buyers the basic info needed to start comparing different lenders.
- Homebuying is inherently stressful and getting pre-approved reduces the loan-related anxieties. Hiring a great agent to guide you through everything will minimize any remaining stress. And perhaps yoga.