Mortgages can be confusing, especially for first-time home buyers. Many believe that when it comes to mortgages, pre-approved and pre-qualified mean basically the same thing. However, this is not the case, and mistaking one for the other may cause a setback in your home buying process.
Pre-qualified is typically the first step in the mortgage acceptance process. During this process, the mortgage lender determines the amount and type of loan for which borrower will be approved. The lender typically uses your self-reported information to make an estimate; sometimes your financial history is not accessed during this process. A pre-qualification letter is a letter that the lender writes for you to give to your real estate agent. It describes the loan for which you have been pre-qualified, but this does not mean you have already been approved for this mortgage. The letter states that you have talked to a mortgage lender about your options and are moving in the right direction toward obtaining a loan.
Pre-approved means a mortgage lender has looked at your financial history, such as your debts, income, and credit report. You might fill out an official mortgage application. (Use our mortgage application checklist to gather what you need.) Once the lender has accessed this information, he/she will write up a pre-approval letter. This letter shows the real estate agent or seller that a lender has examined your financial records and approved you for a mortgage loan. The pre-approval letter will state an exact amount for which you are approved, rather than an estimate. This will allow you and your real estate agent to begin looking for houses at or below your price level. When choosing between the two options, it is best to go ahead and get pre-approved because this puts you one step closer to obtaining an actual mortgage.
Feel free to contact us if you have any questions about the home buying process.