Bobby Unser once stated, “Success is where preparation and opportunity meet”. When it comes to preparing to buy a home, this is wise advice. Without education and preparation about the mortgage loan process, buyers might make the unfortunate mistake that a pre-qualification means they are approved for the mortgage loan. This could not be farther from the truth. The difference between a prequalification and a pre-approval could make or break the deal that you are working on and waste a considerable amount of time. If, like so many, you are confused about the two, we explain the difference and why lack of understanding could mean disaster for the new home buyer.

What Exactly is a Pre-Qualification

Simply put, pre-qualification is no more than a conversation between you and your broker or lender. You tell the broker or lender your financial circumstances and what you know about your credit history. The broker or lender takes only what you told him to determine how much buying power you have in terms of the purchase price. Without verification of this information, there is no possibility of pre-approval. In fact, a pre-qualification is simple enough to be done quickly by telephone with no cost involved because there is no in-depth analysis of credit, income, assets, or debts.

Pre-qualification does have its benefits. With preliminary information, you can begin to get an understanding of properties available in the price range that you are prequalified for. In addition, you can begin preparing for the requirements of your loan as well as the options that could be available to you.

However, pre-qualification is a quick, unverified procedure. Because of that, it is not to be considered a guarantee of a loan approval. Simply put, it is the amount that you could borrow and expect to be approved for if all of the information you provided verifies as accurate upon an actual approval procedure. The bottom line is that a pre-qualification must be investigated more thoroughly to become an actual pre-approval.

How to Turn Your Pre-Qualification into Pre-Approval

A pre-approval is more involved than a pre-qualification. However, it is the full picture that gives much more information into your ability to borrow for money need for your dream home. When you come to your broker or lender prepared for a pre-approval, you get the benefit of all of the information needed to obtain a conditional loan commitment from the lender. There are a few things that you will need for a pre-approval:

• Application: A pre-approval requires a full mortgage application that gives us a history on your income, assets, debts, and other important information.
• Supporting Documents: Speed up the process with your recent paycheck stub and bank statement. If you are self-employed, send your previous 2 years tax returns to assist in obtaining the full approval analysis. Lenders calculate self-employment income differently than the borrower does.
• Credit Report: The picture is never complete without a full analysis of the credit report. While it is true that the credit score is a big piece of the puzzle, other things such as collections and derogatory information is reviewed.
• Lender pre-approval: This means that your application and credit are enter into the lenders desktop underwriting system to further analyze your loan to get a written approval directly from the lender. This step is important, but many brokers and lenders skip this. With this type of conditional commitment, you not only know that you are approved, you have a full list of items needed to get the loan through underwriting.

You have the option of obtaining a pre-qualification then moving toward the pre-approval or going straight for the bottom line with an actual pre-approval. If you are going straight for a pre-approval, it is important to do so with the broker that you are going to stick with since your credit is pulled with a preapproval. Every time credit is pulled, your credit score is slightly reduced.

Because the pre-approval comes with a conditional commitment from the lender in writing with the exact loan amount and interest rate available, you are in an advantageous position when dealing with the seller upon offering a purchase price. You are actually conditionally approved versus qualified. In addition, you know exactly what you can afford, the down payment, and a preliminary interest rate.

All of this helps you to save time and eliminate guesswork of looking for properties above what you can afford or outside of what you are approved for. Pre-approval allows you move faster at securing the perfect home that you want when you find it. This lets the seller know that you have taken the steps to prove your income and debt profile and are serious about pulling the trigger on the purchase. In a competitive market, this could be the one thing that prevents you from losing the home to another potential buyer.