If you’re starting to think about buying your first home, you’ve probably heard someone mention getting pre-qualified for a mortgage. It sounds like a good thing, right? You want to be sure you’ll qualify for a mortgage before you do any serious shopping.
However, a mortgage pre-qualification isn’t quite what it sounds like. While pre-qualifying can help you narrow down your choices, a mortgage pre-approval may be what you really need.
Learn more about what these things mean to decide what’s right for you.
Pre-Qualification and Pre-Approval
Getting pre-qualified for a mortgage and pre-approved for a mortgage sound like they might be the same thing, but there are important differences.
In a mortgage pre-qualification, a lender gives you a basic idea of how much money they’ll be willing to lend you. They base this estimate on the information you provide in your application, but they do nothing to verify things like your income and credit score. They do not look deeply into your credit history. It’s a quick estimate, and you can often get this quote over the phone or internet.
A pre-approval, on the other hand, requires a more thorough vetting. You tell the bank you earn so much a year, but they’ll verify it by looking at your pay stubs or tax returns. They’ll order a copy of your credit history to determine your rate. In the end, you get a mortgage offer from the bank that tells you how much they’ll lend you and at what rate. Often, you can lock in the rate at this point.
Essentially, the difference is the pre-approval is a more accurate representation of what your possible mortgage could look like.
Why You Might Want Pre-Qualification
Pre-qualification is a good first step for someone in the early stages of home shopping. It gives you an idea of how much home the bank thinks you can afford, and this helps you set realistic expectations when you look at potential properties.
For many people, the pre-qualification is a wake-up call. They realize they’ll need to start with a home that’s in a more affordable price range, reduce their debt, or save up a much bigger down payment to get the home they really want. Since the pre-qualification requires little time or effort, it’s a good place to start.
Getting Your Pre-Qualification
To pre-qualify for a mortgage, you simply need to fill out a form with your bank. They will ask you for salary info, so if you don’t know that off the top of your head, you may want to look it up on a pay stub. You’ll also need to list your debts on the application, so be sure to total those up and make a note of the minimum monthly payment for each account.
While a pre-qualification is a good starting point, it can give people a false sense of security. Some people mistakenly think a bank who has given them a quote through a pre-qualification has approved them for a mortgage. Once the bank sees a low credit score, though, they won’t approve the mortgage application.
Others don’t realize that the bank doesn’t consider money earned through bonuses and overtime pay when they make their decision. If you were to quote a monthly salary that includes these additional amounts, the money the bank will actually loan you may be far less than what they told you during the pre-qualification process.
You just have to remember the bank doesn’t verify any of your information during the pre-qualification process. If you have a straightforward salaried job and a realistic sense of your credit score, pre-qualification and pre-approval may have similar results. However, those who have unusual financial situations may be in for a surprise when they really apply for the mortgage.
Do You Really Need Pre-Qualification?
You do not need to be pre-qualified to start looking at homes. Getting pre-qualified can give you a better sense of how much money you’ll qualify for, but you can sometimes make estimates on your own using mortgage calculators. If you’re ready to get serious about buying a home, though, you probably want to apply for pre-approval, not pre-qualification.
You want to take a realistic approach when shopping for your first home. You need to know how much you can afford. If you’re in the early stages of shopping, getting pre-qualified for your mortgage will help you narrow down your choices to the types of homes that are right for your budget. Fortunately, StreetSide Developments offers a variety of brand-new budget-friendly options for first-time buyers. Get your pre-qualification, then stop by to see how far your money can go.