Getting approved and accepted for a mortgage loan is instrumental in purchasing a home. But we often find that there is a lot of confusion around the difference between being pre-qualified for a loan and pre-approved, especially among first time home buyers. In order to understand how the loaning process works and how to move along the home buying process, it’s important to understand how pre-qualification and pre-approval differ.
What is Means to be Pre-Qualified for a Loan
The pre-qualification process is usually the first step someone takes when they are considering purchasing a home (before they start looking). When you visit a bank or lender, you’ll have a chance to sit down with them and discuss your financial information such as your income, debts, assets, and available down payment amount to determine a ballpark price range of homes that would fit within a monthly mortgage payment that you could afford and the various mortgage options that are available to you.
A pre-qualification is typically a free and relatively quick process, and neither you or the lender is committed to the numbers you discuss at that time. It simply serves as an estimate of what you could expect to be approved for and gives you an idea of what you could afford so you can start looking for houses. You will need to be pre-approved before you can move forward with actually purchasing a home.
What is Means to be Pre-Approved for a Loan
Unlike the pre-qualification process, which is a quick estimate of a monthly mortgage payment that a lender believes you could afford based on your income and current financial state, a pre-approval takes an in-depth look into your finances such as your credit score to create a conditional commitment for an exact loan amount.
During this process you will need to complete an official mortgage application and supply your lender with information and documentation in order to investigate your financial background and credit rating. After that has been completed, the lender can give you specific details on the mortgage amount that you are approved for as well as give you an idea of what your interest will be.
The lender will provide you with a conditional commitment (in writing) for the exact loan amount you are approved for so you can start looking for homes in your price range.
Do you have more questions about the home buying process? Download our free First Time Home Buyer Guide below!