While the terms pre-qualified and pre-approved are often heard interchangeably in the discussion of homebuying, they each have their own distinct meaning. In this blog we will look at the the differences between pre-qualified and pre-approved.
Pre-qualification for a mortgage is an unofficial evaluation of creditworthiness, an indicator of meeting minimal requirements, and a guideline for establishing affordability for the prospective borrower.
Pre-qualification is the initial step to exploring the financial feasibility of obtaining a home loan, whereas a mortgage pre-approval requires an in-depth look at the borrower’s creditworthiness and ability to repay, and is a more solid indication from a lender to the borrower on the amount they can borrow and on what terms.
Pre-qualification can typically be done quickly and there’s usually no cost involved. Rather than find a home then look for a mortgage, it’s a better idea to look at the mortgage options first. In fact, in today’s competitive real estate market, most realtors request that potential buyers determine their pre-qualification status and many sellers require it before entering a contract.
In order to prepare for the pre-qualification process, begin by reviewing your credit report and getting your credit score. If the plan is to purchase the home with a spouse or another person, they will also need to request and review their credit report and scores.
Next, consider the amount you have available for a down payment. Putting a larger amount of money down may lower your interest rate, monthly payment, and can eliminate the need for private mortgage insurance (PMI) with conventional mortgages. However, U.S. Department of Veterans Affairs (VA) loans may not require any money down for eligible active servicemembers, veterans and surviving spouses, while Federal Housing Administration (FHA) loans require only a 3.5% down payment.
Last, but certainly not least, list your assets and calculate your income-to-debt ratio by dividing your outgoing monthly payment expenses by your monthly gross income. Do the same for any co-applicants. The mortgage amount you qualify for will be based on this calculation.
Compiling this information early in the process may give you time to pay off some balances and reduce your debt ratio or correct credit events that may have been incorrectly recorded and possibly improve your credit score.
At 1 Stop Lending, our number priority is you, our valued client. We are here to discuss your goals or needs regarding a mortgage, and help you become pre-qualified for a mortgage option that is right for you.
If you are interested in learning more about mortgage pre-qualification, we are just one phone call, text or email away from answering any questions you have. Please visit https://1stoplending.net for more information.