If you’re a first time homeowner, the mortgage process can be somewhat daunting. Even people who’ve owned a home before can get confused by the process. However, one important thing to understand is the difference between being prequalified for a mortgage and being pre-approved for one.
It can be easy to use the terms interchangeably, but because they mean different things, it’s good to be on the up-and-up with regards to terminology to make the home buying experience one with minimal stress.
- What does it mean to be “prequalified”? When you are prequalified for a mortgage, your lender has an estimate for you, which explains how the amount you will need in order to buy a home. They create this estimate using information you’ve already given them, such as your income, assets, debt, and credit score. This is an informal process, and does not signify any sort of commitment on the lender’s part to provide you with a loan based on the estimate. This rough estimate is intended to be a guide through the process, helping you understand what you can afford so you’re not shopping for homes out of your price range. It also gives your realtor an idea of which homes to show you, and reassures them that you’re a serious buyer.
- What does it mean to be “pre-approved”? Being pre-approved for a mortgage is a more complicated process than being prequalified. It’s more formal and involved for both the buyer and the lender, with a detailed credit check and proof of assets from the buyer. Usually, you’ll be asked to provide recent pay stubs, a few months of bank statements, and W-2s for the two previous tax years. The lender will be more confident that this information will approve your loan request, as being pre-approved does not necessarily guarantee you’ll receive that money. It’s also important to understand that between being pre-approved and your closing date, interest rates, issues with appraisal, or your financial situation may change. Pre-approvals also have expiration dates, and repeated pre-approvals can affect your credit rating.