The real estate market is booming right now. With low interest rates and changing consumer preferences as a result of COVID, we are seeing strong activity. If you’re looking to enter into the market, there are a few areas to consider prior to purchasing a home. In the mortgage process, the terms “pre-qualification” and “pre-approval” are common and important. Do you know the difference?
In short, pre-qualification is less formal. It includes discussing income, debt, and other financial pieces with a lender. At the end of the conversation, the lender will be able to estimate how much a person could receive in a loan. This is not a guarantee; rather, it is an estimate based on the information given. Oftentimes this information is self-reported, not pulled from credit reports or paystubs.
Pre-approval is a step beyond pre-qualification. The pre-approval process actually verifies a person’s finances and credit score and goes through an underwriter. A person must submit paystubs, tax returns, bank account statements, and W2s, along with other applicable financial documents. Upon completion of this and the mortgage application, the potential buyer receives a letter stating the pre-approval amount.
We find it helpful for potential buyers to complete the pre-approval process for a couple of reasons. First of all, knowing the amount a person may afford allows buyers to look at homes most suited for them. Instead of looking over or under a pre-approved price range, buyers may seriously consider homes in the correct price range. We have had situations where buyers are pre-qualified for a certain amount, but after the pre-approval process, they realize they are actually approved for a higher-priced home. By obtaining pre-approval, buyers may maximize the time looking at well-matched properties, and minimize the time waiting for a loan approval in this scenario.
Additionally, obtaining pre-approval places a buyer in a stronger position. For example, if a seller receives two offers, one of which is pre-qualified, and one is pre-approved, the likelihood is that the seller will select the pre-approved offer, as it is more secure. The closer an offer is to the approval process, the stronger it becomes.
In general, understanding these differences allows buyers to navigate the process of buying a property more smoothly. It also allows sellers to identify the differences between potential offers.
With the activity in the market and the competition for buyers, it’s essential to place yourself in the strongest position possible. As interest rates remain at an all-time low, the lending process is important to understand, as it plays such an impact on buying a home and allows buyers to maximize their purchase price. As always, we are available for any questions you have on the market or the lending process.