Pre-Qualification and Pre-Approval: Two Separate But Important Steps Toward Buying A Home

First-time homebuyers are often perplexed as to the difference between pre-qualification and pre-approval, two steps that every real estate professional knows is essential to the home buying process. Both are important for different reasons and without both, you will likely not be able to own your own home. Undoubtedly, the financial side of any real estate transaction is stressful, tedious, and often requires buyers to unearth documents they may not know exist. Ensuring you have both pre-qualification and pre-approval will help make closing on your home a better and easier experience than rushing to find documents at the last minute.

What is pre-qualification and why is it important?

Pre-qualification refers to a lender’s letter demonstrating that you qualify for a mortgage of a certain amount of money based on a variety of factors. Often, many real estate professionals such as realtors or brokers will ask for this letter before they begin showing you properties in your desired price range as the letter reflects that you are a serious buyer with the ability to purchase a home in the stated price range. Banks will take into account your credit score, assets, and other questions to determine what programs and amounts you are qualified for. Of importance is that a credit score for a loan application may not necessarily reflect the one you see online. Any score over 720 is considered optimal and will likely make you a competitive customer for any lender while any score less than a 580 may limit your ability to buy a home.

Additionally, banks analyze your Debt To Income (DTI) ratio where a lender totals your minimum monthly payments on your credit report and adds them to your proposed monthly payment should you take out a loan with them. Anything under 50% is helpful while any score over 50% may limit your ability to be pre-qualified. The lower your DTI, the more competitive your application will be. Finally, the down payment amount – anywhere from 3 to 20 percent – will help demonstrate your risk or lack thereof and could help place you in a more advantageous program.

Pre-approval 

Pre-approval is more stringent than pre-qualification and often requires buyers to submit paystubs, tax returns, or other documentation which verifiably demonstrates their income and obligations. This more thorough review of a buyer’s financial state helps save time in obtaining a loan with the exception of closing costs and other associated transactions to the purchase of the home. From both a buyer and seller’s point of view, pre-approval is the gold standard in helping move the financial side of the transaction as quickly as possible and helps minimize the risk that a lender will not approve a transaction.

When it comes to any home transaction, there are several major pitfalls that can befall even the most experienced buyer. That’s why it’s important to have as much prepared as possible before any potential transaction to save time, money, and heartache over a possible failed transaction. A pre-approval letter helps demonstrate the seriousness of both parties and the lender to the home buying transaction.