Pre-Qualified vs. Pre-Approved: Which to Choose?

You may have heard that you need to pre-qualify or be pre-approved for a mortgage if you’re house hunting. But there’s some confusion around what makes them different and which ones sellers would prefer to see. So, we tapped the expertise of Cincinnati-based Ron Erdmann at Guaranteed Rate for some helpful insight.

 

According to Erdmann, these are two key steps in the mortgage application process. “Some people use the terms interchangeably, but there are important differences that every homebuyer should understand,” he explains. “Pre-qualifying is the first step that gives you a general idea of how large of a loan you might qualify for. Pre-approval is the second step, and it’s much more involved. It’s based on verified consumer data and a conditional commitment to actually grant you the mortgage.”

 

Getting pre-qualified for a mortgage involves verbally supplying a bank or lender with a general overall financial picture, regarding your income and debts. The lender reviews that information and gives a ballpark estimate of how much the borrower can expect to receive, Erdmann says. “Pre-qualification can be done over the phone or online, and there’s usually no cost involved,” he adds. “It’s usually a quick process, and it can sometimes be done in as little as 10 minutes.”

 

Getting pre-approved is the next step, and it’s a lengthier, more official, process. “Pre-approval involves the lender asking significantly more detailed questions regarding your income, assets and debt,” says Erdmann, “pre-approval is carefully calculated and a significantly better indication of creditworthiness and ability to borrow.” 

 

Erdmann says pre-approval should start with the borrower meeting with a well-qualified mortgage professional to complete a pre-approval application. “They’ll need to supply the lender with all the necessary documentation to perform an extensive credit and financial background check,” he explains. “Then, if they qualify and are approved, a lender will then offer pre-approval up to a specified amount. It’s important they work with an experienced mortgage professional who will do all the research required to get them the best options.”

 

When it comes to pre-approval, Erdmann says there are five main things he wants people to know: 

1) Most realtors want you to be pre-approved so you know – for sure – what price range you’re looking for. 

2) With the current rates possibly much lower than the last time you bought a home, you may be able to buy more home than you think. “Sometimes a buyer thinks that a payment is going to be higher than it is and they’re looking for a house at a lower price point than they could afford,” Erdmann explains. “On the flip side, someone might be looking at a property that’s much higher than they can afford because they’re not calculating in property taxes or other factors they might not fully understand.”

3) The seller wants you to be pre-approved so they don’t make plans to move, only to realize you can’t go through with the purchase of the house. 

4) If an experienced Realtor suggests you to get pre-approved, they aren’t questioning your financial resources or ability to get a loan. “They’re just encouraging you to plan ahead and talk with a great lender so you have a great experience,” he explains. 

5) Regardless of if you or your realtor feel it’s important, it’s going to be important to sellers. “So the sooner the better to get it done,” Erdmann says.

 

Is there any downside to being pre-approved earlier versus later? “Pre-approval isn’t a fail or pass situation,” Erdmann says. “Some buyers want to wait until they get a job promotion or to pay off credit card debt before exploring pre-approval. But a great lender can tell you where you stand now, and what changes you can make over time to improve your application and probability of pre-approval down the road. You might be worrying about something that’s not an issue.”

 

Erdmann says clients are often concerned that getting pre-approval will negatively affect their credit score. “The biggest pushback I get from clients is that they’re very protective of their credit scores. In reality, credit inquiries have a very minimal impact on your score, so don’t let that hold you back. A reputable source will explain mortgage pre-approval affects your credit score.”

 

To learn more about Ron Erdmann, NMLS 728342, Branch Manager and SVP of Mortgage Lending at Guaranteed Rate, visit https://www.rate.com/loan-expert/ronerdmann You can also contact him via email at ron.erdmann@rate.com or call (513) 609-4484.