Pre-qualified mortgages and pre-approved ones are easily confused, but different in important ways.
Think of it this way: When a bank pre-qualifies you for a mortgage, it’s like a wedding proposal without a ring. It’s promising, but not a lock. Pre-approved means the bride-to-be not only gets the ring, but gets the proposal in writing.
Let’s run both through the MainStreet ringer.
Pre-qualified: Getting pre-qualified means that a lender states that you qualify for a particular loan amount, though you are still subject to a more rigorous final approval process. In order to pre-qualify, you generally provide a lender with key criteria such as income, assets, debt loads and the amount of a potential down payment. It’s the first major step in the loan approval process, but not the deal-closer.
Pre-approval: Pre-approval means that a lender has reviewed your financial situation and you are, after a last minute review, approved for a specific loan amount. In the pre-approval process, your lender will review your credit report, verify income and assets, examine debt and have you complete a formal loan application. That information is forwarded to a primary lender like Fannie Mae or Freddie Mac who offer the initial approval (meaning they will back the loan). Note that even with a pre-approval for a mortgage, your loan is still subject to final verification of the information included on your loan application. Usually that means a financial setback in the time since you first presented an application, like the loss of a job or a tax lien.
In the mortgage approval hierarchy, pre-approved trumps pre-qualified, although pre-qualified is an important step in navigating the home mortgage obstacle course.
A “prequalification analysis” essentially examines your current debts, your proposed down-payment and your annual income. The steps to becoming pre-qualified are pretty basic:
Step One: The lender will want a good head-to-toe snapshot of your financial health. They will ask for information, but probably not documentation, about where you stand in three key areas: debt, income and assets.
Step Two: Based on how you fare in your fiscal examination, the lender will make a recommendation on the size of the mortgage for which you could qualify. This isn’t a guarantee, it’s just a recommendation. The process itself is normally done over the phone, but like most other services these days, pre-qualification can be done online, via the lender’s web site.
Step Three: Now that your lender has a snapshot of your financial picture, you’ve graduated to “maybe” status in mortgage-speak. At this juncture, your mortgage lender will begin to explore deeper mortgage options with you, such as what type of mortgage options are available as well as what fees and extras you’ll be facing.
Don’t worry about a lender reviewing your credit report. That step isn’t usually taken until you begin to pursue mortgage pre-approval. It’s a good idea to test the waters first by performing your own pre-qualification analysis at our partner site, BankingMyWay.com.