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What Is the Difference Between Pre-approval and Pre-qualified? Which One Should You Get?

Getting a pre-approval will allow your lender to dig deeper into your finances to verify your credit, income, and assets. How do you get a pre-approval and when should you get one? 

  • If you are looking to buy within six months, you should start getting pre-approved now. This allows you to plan for what you can afford.
  • Contact any lender to get pre-approval. The lender you use for pre-approval does not have to be the lender you use for your home loan. The lender will look at your finances and give you a pre-approval letter that states what you are approved to borrow.  
  • It’s important to get pre-approved before you start looking at houses because sellers won’t accept an offer without it. 

Is a Pre-approval Better Than Getting Pre-qualified?

So, you’ve decided you want to buy a house, what is the first thing you should do? You should find out whether a bank will approve your mortgage application. You can find out in two different ways. 

One way is pre-qualification. The better route is pre-approval. They are both very different, so here is what you need to know. 

It’s Great to Get Pre-qualified, but Not the Best

A pre-qualification is easy and quick to get. You can get one over the phone, internet, or by email. The lender will ask you different questions in order to determine whether you qualify for a mortgage. 

They vary by lender but pre-qualification questions typically include:

  • What is your credit score?
  • How much do you make annually? 
  • How much funds do you have at your disposal? 
  • Do you oversee more than 25% of a business? 
  • Are you recently self-employed? 

A lender may additionally ask if you have had a bankruptcy, short sale, or foreclosure within the last few years.

The answers you give to these questions will allow a lender to determine what mortgage programs you are eligible for. The best thing about a mortgage pre-qualification is that it’s easy to deal with. The bad thing is it’s based on the information you give to your lender.

You may think you know your credit and your income, but what if you are wrong? This is why pre-qualification is not really reliable. It’s a non-verified guess as to how much of a home you can afford. 

Pre-approvals are always a better approach to home buying. 

Why Are Pre-approvals Better?

It will take more time to get pre-approved for a mortgage than to get pre-qualified. The extra time that it takes to get the pre-approval is worth it in the long run. 

During the pre-approval process, the lender will dig deeper into your finances than they do with a pre-qualification. Unlike just asking you as they would in a pre-qualification, a pre-approval makes you prove it. Pre-qualifications do not verify debt-to-income, and pre-approvals do. 

Let’s say your lender asks how much money you have in the bank and where you got that money from. You will have to verify these funds with a bank statement. 

The lender you use may also ask to see your recent W-2s and tax returns to confirm your eligible income. They will then compare this to your credit report to find your debt-to-income ratio (DTI). Debt-to-income ratios are a key standard for mortgage qualification. 

With a debt-to-income ratio below 40%, borrowers may be eligible for all available loan programs. That would include conventional, FHA, VA, and USDA financing. If a buyer has a debt-to-income ratio between 40-45%, they may be limited to the VA or FHA. 

A pre-approval can also reveal hidden collections like judgments and liens that can stand in the way of you getting approved. That is why sellers and agents want a buyer to submit a valid pre-approval letter when they make an offer. 

Sellers do not want to waste time on offers from buyers who have not taken the time to see if they are even approved. This is why pre-approval is important. Some agents require them to even view houses in person.

Pre-approvals Can Cost Little to None

Without a pre-approval letter, sellers will not accept your offer. It’s a good thing that getting pre-approved is easy. You will need to get in touch with a lender first. It can be any lender you want.

Your local bank doesn’t have to be the one to write your pre-approval. You also don’t have to use the same lender when you go back for your home loan. The most important thing is that you speak with a lender and get a pre-approval letter.

When you speak with a lender make sure to be honest about your finances. Mortgage lenders have to do a lot of due diligence, much more than they did in the early 2000s. If you try to hide something, they will find out, and it can cause them to deny your loan. 

Even if you recently started a small business and have not made any income yet, you should still share this with your lender, they will decide what is important and what is not. 

It’s also a good thing to tell the lender if you have non-credit reporting debts like a personal loan from a family member or friend. The last thing you will have to do is let the lender pull your credit. 

Does It Hurt Your Credit to Get Pre-approved?

When you get pre-approved it will not hurt your credit. It is a normal part of life to apply for any type of credit. When your credit is getting pulled for pre-approval, the credit bureaus will not take away points. states that a credit score from a mortgage-related inquiry only impacts you by less than 5 points. 

Even if you request pre-approvals from multiple lenders it will still not hurt your credit. Multiple inquiries are considered as one as long as they are all within 30-45 days. This depends on the credit scoring method that the lender would use. 

If you have applied for other types of financing you may see your score drop. If you recently got a new credit card, car loan, or refinanced your student loans in the last month, a credit inquiry could do slight damage. 

Credit bureaus may think you are in danger of bankruptcy if you try and finance many things at once. 

The average applicant will not have their home-buying efforts put on hold by requesting a pre-approval. 

Should I Get Pre-approved Now if I’m Not Buying for Another 6 Months?

Yes. Because you can’t ballpark how much you will get approved for, it’s good to find that number out as soon as you start thinking about buying a home. It’s common for buyers to be blindsided by what they actually can or can’t afford. 

If you’re looking at buying in 6 months, you should start researching the housing market online. Keep your options open and never assume you will get approved for a high price just because an online app said so. Being prepared  is a great thing. 

Getting Pre-approved Today

Currently, mortgage rates are still pretty high, but they are expected to come down as 2023 nears. If you are planning on buying a home in the next 6 months, always keep in mind to get pre-approved first. It is free to speak with a lender and it’s not set in stone that you have to proceed with them. 

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