A little preparation goes a long way toward ensuring you get the home you want at the price you want. Once you’ve found what looks like the perfect property, you may feel a sense of urgency about snapping it up before someone else gets it. That’s when you’ll appreciate having prepared yourself by getting pre-approved for a mortgage loan, not just pre-qualified. You don’t want a deal for your perfect dream home to go south just because you didn’t have your ducks in a row.
Pre-Approval vs. Pre-Qualification
So what’s the difference between getting pre-approved for a loan and getting pre-qualified? It’s simple. Do you remember what all the junk-mail advertisements say when they want to send you a new credit card you don’t need? That’s right, they tell you that you’re “pre-qualified.” Then when you go to send in all the information they ask for, you may find out that you were not in fact approved for as much money as they suggested you “qualified” for.
That’s because in the lending world, “qualification” does not mean you really do qualify for the loan. It means you have been pre-screened to get past the first step of getting approved based on the preliminary information you’ve submitted on forms.
Pre-approval is entirely different. With pre-approval, you have already submitted important documents like tax records and bank statements, and the bank is pretty much ready to sign on the dotted line unless some new information comes along to change their minds.
Why does it matter?
Getting pre-approved instead of pre-qualified matters as a buyer for three important reasons.
It shows the seller you are serious
If the sellers are considering several offers, or if you are offering substantially below their asking price, being pre-approved could get you the deal. If you are simply pre-qualified, the seller is taking a much bigger risk in accepting an offer, pulling the home off the market, only to potentially have your loan go awry in the approval process. If you are pre-approved, you’ll have a letter in hand from your lender stating that, and this will go a long way toward making the seller comfortable that you both intend to close the deal and have the financial capability to do it.
It gives you negotiating leverage over other offers
Sellers who are considering more than one offer are usually going to go with the safer-looking offer. All things being equal, someone with a letter of approval is much more likely to actually complete the purchase, so sellers may be open to a lower offer if it looks more serious than a higher one from a buyer that hasn’t taken the time to prepare by getting pre-approved.
You can close faster
If you are pre-approved for your loan, there are fewer things to do before closing. Most of the time in an escrow period is for the purpose of allowing the lender and buyer to get their paperwork in order to fund the loan. The lender needs to find underwriters for your loan, which requires detailed documentation. There are bureaucratic requirements from the lending institutions. There needs to be time to do a home inspection and appraisal.
All of that takes time, so if you can get some of that done before making an offer at all, you will be prepared to close on your dream home more quickly. That means getting into your dream home sooner, and that along is worth the extra effort to get pre-approved for your mortgage loan rather than just pre-qualified.