If you are familiar with the real estate market, you most likely know that as a home buyer, you need to pre-qualify or be pre-approved for a mortgage before purchasing a property
As most credit repair companies in Austin, Texas will tell you, both of these aspects are crucial in the mortgage application.
Some people use pre-qualify and pre-approved interchangeably. Even though this may go unnoticed in some circles, anyone familiar with the real estate market knows that they are different in several ways, and it is up to every home buyer to understand exactly how, especially if you want to understand how to build your credit faster.
That said, pre-qualifying can be defined as the first step toward securing a mortgage; it gives you an idea of how big a loan you will most likely qualify for. On the other hand, pre-approval is the second stage and involves additional and verified information in order to ascertain your credit worthiness.
One could also say that the pre-qualification phase is based on consumer-submitted information, whereas the pre-approval depends on consumer data like a credit check. This is also something that you will find when looking at what Transworld Systems is.
The main benefit of completing both these steps, pre-qualifying and pre-approval, before searching for your dream home is that it provides you a rough idea of how large of a loan you can obtain. This means that you won’t waste time looking at properties above your mortgage loan limits. The other positive aspect is that getting pre-approved for a mortgage also helps speed up the purchasing process as it lets the seller know that your offer is a serious one, which is especially important in today’s competitive real estate market.
As a borrower, you will also provide your lender with a copy of the purchase agreement and any other relevant documentation needed for the underwriting process once a home has been picked and an offer made. The lender will also secure the services of licensed or third-party contractors to conduct a home appraisal process to determine its value.
Another vital point to note is that in some cases, you may be eligible for more money than you had initially planned to spend. However, you don’t have to use any more money than what's available in your personal budget. Also, even with such an offer on the table, limiting your home search to those priced at an amount that will not place you under financial strain is still advisable. Therefore, you should explore mortgage amounts that adequately fit into your plans; you can even try out a home affordability calculator to make things easier.
Purchasing a home is a big deal. When the time comes, whether it’s your first home or you are moving into a new one, you’re most likely in need of a mortgage. With all of the information available, it can be overwhelming knowing where you’re supposed to start.
Pre-approval and pre-qualification are two terms that seem to be used interchangeably, depending on your lender. However, the differences are subtle, and figuring out which one you’re supposed to pursue can be challenging.
Let’s take a closer look at the differences between pre-qualified and pre-approval so you can determine the one that’s right for you.
Getting a letter in the mail that you’re “pre-qualified” for a loan or credit card essentially means that the creditor has done a fundamental review of your creditworthiness and you seem like a good candidate for a loan. Typically, a consumer has initiated the process by completing and submitting a pre-qualification application. Requirements for pre-qualification vary by lender and involve sharing basic financial information like your annual income, monthly housing payments, and any savings you may have.
In some cases, a lender may check your credit by initiating a “soft inquiry” into a credit bureau to get a glimpse of your credit background. Be aware that a soft inquiry has no impact on your credit score, but it can give the lender enough information to decide whether or not you would meet the minimum requirements for lending.
At this stage, the lender may tell you that you are pre-qualified, and you can choose whether or not you want to make an official application and continue with the review process. This usually requires you to submit official documentation and agree to a hard inquiry on your credit report, which can impact your credit score. It’s important to note that while you may pass the pre-qualified bar, it doesn’t guarantee that you will be approved.
The benefit of pre-qualification is that if you get denied at this stage, you can move on to another lender or creditor without having a hard inquiry impact your credit score. With pre-qualification, you’re only receiving a ballpark estimate of how much you can borrow. Your lender is only taking into consideration the data that you provide without requiring validation; there is no commitment on the lender’s part to guarantee you will be pre-approved or approved. It’s merely a high-level evaluation of whether or not you’re eligible for a mortgage loan and a rough estimate of how much it could be.
A pre-approval confirmation is the next step after pre-qualification, and you’ve submitted the proper documentation to complete a ”hard inquiry.” Pre-approval requires you to complete an official mortgage application, including all the necessary documentation for an extensive evaluation of your financial history and situation. A pre-approval application sometimes requires an application fee, depending on the lender, and can cost several hundred dollars.
Once the lender completes your pre-approval application, it will typically specify a maximum amount of credit it is willing to give you. It will also give you an idea of the interest rate you can expect to pay. Once you are pre-approved, you will receive a conditional commitment from the lender in writing for the exact loan amount you are qualified for–with this document, you’ll know exactly how much you can afford for a home, and you can look for places that are at or below your approved price level.
With a pre-approval in hand, you’re not only one step closer to getting an actual mortgage, but sellers will know that you’ve secured a loan amount and you’re serious about buying.
While pre-approval and pre-qualification are similar, there are slight differences. Pre-qualification is considered the first step in the mortgage process, while pre-approval is the second step. A pre-qualification is simply a high-level overview of your financial history and typically doesn’t require documentation to verify.
Moving into pre-approval does require hard evidence and documentation of your financial situation, including all your income, assets, and debts, and a deep dive into your credit history resulting in a hard inquiry on your credit report.
To figure out whether you need to be pre-qualified for a mortgage or gain pre-approval, you need to look at the lender’s definition of each. Because these words are interchangeable in different companies, it can be hard to know which one you should be focusing on.
Ask your lender how it defines pre-approval and pre-qualification, and which requires a credit check as a hard inquiry. You’ll also want to check-in with your real estate agent, as they’ll have an inside view into which is required and provides more credibility for the market in which you’re looking to buy.
Because the definitions of pre-approval and pre-qualification can vary, you need to ask your lender about its process and the interpretations it uses. While neither pre-approval nor pre-qualification guarantees a loan offer, both can give you an idea of how much you may be able to borrow to purchase your home.
The home buying process can be confusing, especially when you’re dealing with terms that are often used interchangeably. This is why your best course of action is to talk with your real estate agent and prospective lenders about their processes and what’s needed to meet the minimum requirements for home buying.
Getting pre-qualified for a loan or pre-approved for a mortgage means that as a buyer, you will have the necessary information ahead of time, such as the kind of house you can afford. On the flip side, once you are done with both these processes, most sellers will be open to negotiating with you on the property you want. Being pre-approved also means you can close on a home in a shorter time frame.
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