Many future homebuyers are aware that they should take steps before hitting the housing market, to better understand what sort of property they’ll be able to afford under the terms of their mortgage. Unfortunately, not as many people are aware of whether a pre-approval or a pre-qualification is the better option, or even what the difference between the two are.
Let’s start with the simpler of the pair, which is a pre-qualification letter. In most cases, a potential homebuyer can give a loan officer a credit report and find out how much the lending agency will be willing to offer.
A pre-approval involves much more work on the applicant’s part. The paperwork involved includes a credit report, as well as well as the last two years worth of tax returns, the last two years worth of W2s or 1099s, pay stubs from within the last 30 days, plus other asset statements from the previous two months.
Sounds like a bigger pain to complete, right? That doesn’t mean you should skip out on the paperwork and opt for a pre-qualification.
There’s a reason why pre-approval requires so much more documentation. All of the information you provide helps lenders to create a more complete profile of the borrower. The more lending agencies know about you, the more accurate of a picture they can make, and therefore can give you a more precise estimate of how much money and what kind of rates they’ll be willing to offer when you’re ready to make an offer on a home. Some will even run your information through either the Desktop Underwriter or Loan Prospector automated underwriting systems to make sure there’s almost no chance of error.
Many home shoppers don’t realize how much that accuracy means until the worst has happened to them: If the less-than-concrete numbers provided by a pre-qualification don’t pan out, you may discover that the home of your dreams is actually out of your reach, even if you thought you qualified.
There aren’t many experiences in life that are a bigger letdown than that. It makes digging through all of your paperwork for a pre-approval process all the more worthwhile.
That said, don’t let it seem like pre-qualifications are totally worthless. If you’re not sure about whether you want to enter the housing market yet, but just want to get a rough idea for what you would qualify for, a pre-qualification is the smarter option because it doesn’t require loads of work. If you like what you hear from that report, go ahead and go through with the pre-approval so that you have the best information possible when it comes time to make an offer on the home.
Make sure that you’re going through the right processes as you consider shopping for a home. Doing your research is an essential task and nothing prepares you better for the home-buying experience than getting a pre-approval letter.
Primary Mortgage Residential wants to help you get into a new home, and we offer a variety of resources to help you understand the financial process and how to get the best deal on your way to that home. Use these options to get expert tips on home-buying and shopping for loans.
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