If you’re a first-time homebuyer, you may have heard the terms pre-approval** and pre-qualification.1 They’re both important tools in your homebuying toolbelt, but what are the differences between the two? We’re here to walk you through what these terms mean and how you can leverage pre-approval and pre-qualification when finding your dream home.
So what’s the difference? The short answer:
- Pre-qualification is a quick, no-commitment analysis by a lender of how big of a loan you might qualify for.
- Pre-approval is a more in-depth look at your finances and credit, and represents a conditional loan approval by a lender. Pre-approval carries more weight when it comes to putting in an offer on a home you’d like to buy.
Let’s break down the details:
What is Mortgage Pre-Qualification?
When you want to get a rough idea of how much home you can afford, you can ask a lender to perform a pre-qualification, where they do an initial assessment of your financial health and give you an estimation of your borrowing capacity. Basically, it helps you set a benchmark for your homebuying expectations.
Pre-qualification is based on numbers you provide to a lender, including your income and a general picture of your finances.
Features of a mortgage pre-qualification:
- Speed and Simplicity: Pre-qualification is a quick process that can be done online or with one phone call.
- Preliminary Assessment: Since pre-qualification relies on self-reported financial data, it doesn’t represent a firm commitment from a lender.
- Budgetary Planning: The information you gain enables you to gauge your price range for your home search.
What is a Mortgage Pre-Approval?
If you’re serious about buying a home, having a pre-approval in hand could add some real credibility to your offer to a seller. A pre-approval takes the evaluation process further by doing a thorough review of your assets and a detailed analysis of your credit.
At this stage a lender may grant you conditional approval, which means you are approved subject to certain conditions being met later in the home buying process such as the execution of a purchase and acceptable appraisal and title documentation. Once Newrez has all of the necessary documents, you could receive your pre-approval letter in as little as one business day.
Features of a mortgage pre-approval:
- Rigorous Verification: Pre-approval requires documentation like tax returns, bank statements and proof of income, as well as a detailed credit check.
- Stronger Homebuying Power: A pre-approval letter signals to sellers that you’re a serious buyer with the finances to back it up.
- Defined Borrowing Limits: Pre-approval tells you exactly how much you can borrow.
Boosting Your Homebuying Power with Pre-Approval
Getting pre-approved is a great step to take during the homebuying process for several reasons:
- Enhanced Trust: Pre-approval shows sellers and real estate agents that you are reliable and that you have financial backing. This may make sellers more likely to engage with you.
- Negotiating Power: Armed with a pre-approval letter, you can negotiate more confidently, knowing exactly how much you can afford to borrow.
- Streamlined Closing Process: Pre-approval may accelerate final loan processing since much of the verification work has already been done.
Tips to Strengthen Your Mortgage Application
Over the long run, you’ll want to be sure you maintain a stable income and manage your credit well in order to increase your odds of receiving mortgage approval. If you’re ready to shop for a loan, here are a few steps you can take to make your application stronger:
- Reduce Debt: Lowering your debt-to-income ratio could increase your borrowing capacity.
- Gather Documents: Get your financial records organized including your tax returns, bank statements and employment verification to speed up the pre-approval process.
- Consult Mortgage Experts: Newrez loan experts are ready to offer you personalized guidance to finding a great loan for your unique financial situation. Reach out today.
A Visual of the Mortgage Process
If you’re a first-time homebuyer, know that getting a mortgage doesn’t have to be daunting. Here’s a flow chart breakdown of the process from start to finish:
The Importance of Mortgage Readiness
Both pre-qualification and pre-approval are valuable tools when searching for and buying a home. Pre-qualification benefits you as you hunt for a home by giving you an approximate budget range to stay within, and pre-approval gives you more certainty and a big buying power boost once you’re negotiating with a seller.
Combine these tools with some proactive preparation of your finances by paying down debt, looking over your financial picture and tracking down necessary documents. That way, when you’re ready to sign a mortgage, you’re as ready as you can be.
Looking to buy a home but not sure what you can afford? Try out our mortgage calculators. Wanting some guidance from a mortgage expert? We’re glad to help.
**A pre-approval does not signify that all underwriting requirements have been met. Actual terms, including interest rate, are subject to change without prior notice and may vary based on eligibility criteria. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Please contact Newrez for additional details.
1 Offer is contingent upon a full credit review. A pre-qualification does not signify that all underwriting requirements have been met. Actual terms, including interest rate, are subject to change without prior notice and may vary based on eligibility criteria. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Other restrictions and limitations apply.
