What are the Differences Between Prequalification and Preapproval
Before diving into the home buying market, savvy shoppers, like you, already have an idea of how much home they can afford. Both mortgage pre-approval and pre-qualification will give you an estimate, but only one may help you unlock the door to your new home. Here’s what you need to know about both, so you can confidently take the next, exciting steps toward home ownership.
What is Mortgage Pre-qualification
Mortgage pre-qualification is a quick way to get an estimate of how much home you can afford. You may also get some information regarding types of mortgages and which may be the best one for your financial situation or lifestyle. It’s a nice ballpark number to have if you’re just window shopping.
Pre-qualification typically doesn’t take very long and can be done in person, over the phone. You will be asked to give the lender your overall financial picture — debt versus income and assets, and they will estimate how much mortgage you can afford.
Bear in mind that being pre-qualified doesn’t guarantee you’ll actually be approved for that amount.
What Do You Need to Get Pre-qualified for a Mortgage?
If you’re wondering what price range will fit your budget, but you’re not really ready to buy — pre-qualification can give you that price range. Whether you speak directly to a lender or you fill out an online application, they’ll typically ask for the same, basic information.
Income. While you may instantly think of your income as your regular paycheck, it can actually include other things. Do you receive payments for anything outside your day-to-day job? Freelance or odd-jobs count as income. Do you own rental properties? That counts, too. Legal settlements and any payments you may get from alimony or child support may be considered. You may also be asked to provide information regarding disability payments, retirement benefits and investment returns.
Assets. Generally speaking, your assets are anything you own that has monetary value. But, more specifically, your lender will be interested in liquid assets. A liquid asset is anything that can be turned into cash pretty quickly. Checking and savings accounts are considered liquid because you can go to the bank and get cash for them right away. Your stocks, money market funds and bonds are also considered liquid assets as you can typically cash them out in a fairly short period of time. Property, real estate, collectibles, and other items that are harder to sell are not considered liquid assets. These items will most likely not play into your pre-qualification estimate.
Debts. A big part of your financial picture is how much you owe, or your debts. Your debts often fall into two categories. You have debts that you pay regularly, like your car loan or student loans. And then you have debts that fluctuate, like your credit card bills. A lender looking to pre-qualify you for a mortgage will ask you to estimate your monthly debt payments. You can just estimate your fluctuating debts in this situation.
Gathering this information beforehand, or at least having a rough idea, will help you get through the process more quickly. When you’re pre-qualifying it’s important to remember that there are no guarantees so you don’t need to be as precise as you will when you decide to get a pre-approval.
What is Mortgage Pre-approval
Mortgage pre-approval is where the serious home shopping really begins. A pre-approval is much more involved and there is often a fee for this service. The lender will ask for documentation on your finances and will review your credit score.
Once they’ve determined how much they’re willing to loan you, you’ll receive a pre-approval letter listing the amount you qualify for. This is a great bargaining tool in a competitive market as it saves valuable time and shows the seller that you’re committed.
Getting pre-approved may also allow you to lock in an interest rate for a specified time period, so even if interest rates rise, you benefit from the lower rate. When comparing pre-approval vs pre-qualification, keep in mind it’s not an either-or decision. You can get pre-qualified when you start looking, and then, when the time is right, get pre-approved.
What Do You Need for Pre-approval?
If you’re ready to get pre-approved, then it’s time to start pulling your mortgage paperwork. This process is more involved than a pre-qualification because the lender is going to make a commitment to provide you with a mortgage. They are not making that commitment when a pre-qualification is done.
As mentioned above, your lender will want to know your income, your assets and your debts. The one really big difference is this time they’re going to want you to provide proof of all of those items and probably many others. When you get pre-approved be prepared to provide the following:
Social security number. Just knowing your number may suffice for actually showing your card.
Driver’s license or other picture ID. Your lender will need to verify that you are who you say you are.
Proof of employment and proof of income. Plan on providing two, maybe three, years of employment history and income history. This is true for self-employed people as well.
Tax documents. This relates to the above bullet, it gives them a picture of your overall financial situation.
Place of residence. If you’ve only been at your current address for a short time (less than two or three years) you may need to provide previous addresses.
Bank statements. This includes checking, savings, money markets and other bank statements.
Other assets. If you have other investment accounts — stocks, IRAs, mutual funds, these are considered liquid assets and you’ll have to share documentation of their value.
Real estate. Your lender will be very interested in any other mortgages you’re paying. They’ll also want to know if you have property you own outright, or that’s no longer mortgaged. If you’re a landlord, the rental income will be provided in your income statements, but the property has value on its own.
Credit information. This is where your credit report comes into play. Typically your lender will pull your credit report and you won’t have to provide the information directly. But you will have to sign paperwork allowing them to get this data.
Debts. Most of your debts will be included in your credit report, but there may be a few that aren’t, so you’ll want to provide this information, too.
Monthly expenses. Not every lender or applicant needs to supply this information. But, even if you don’t need it, this is great information to have when planning your new budget.
Because every person’s financial situation is unique and each lender has a slightly different process, you may have to provide some additional paperwork. But, at least this list gives you a good starting point.
What to Know about the Housing Market Temperature
If the housing market is “cool” that means that there’s not a lot of activity and, typically, not a lot of competition. Which means that making a bid quickly isn’t too important. Whereas a “hot” housing market puts a little more pressure on the process and tends to speed things up because there are a lot of people looking to buy.
It can be a great benefit to you, if you’re really interested in buying, to have a pre-approval letter in hand and a lender lined up in a hot market. This shows the seller that you’re past the starting line and already in the race. The home seller now knows you’re approved for that amount and the sale will likely go through. With a buyer who doesn’t have pre-approval, it’s not really clear that a lender will back their mortgage and the sale could fall through.
One final thing to remember is lenders often require that you get homeowners insurance before closing on your home. And that’s where we can help. Talk to your American Family agent for easy, affordable coverage that’s right for you.