PREQUALIFICATION VS. PRE-APPROVAL

The terminology used in the mortgage industry today is often misused and prequalification and pre-approval can be defined very differently from bank to bank and realtor to realtor. So, what’s the difference between the two?

Pre-Qualification
A pre-qualification is typically a very general evaluation of your credit, income and debts. A lender may simply ask you how your credit is, what your income is and what your debts are. Based on this information they would calculate how much you could afford making several assumptions along the way. And, in many situations being pre-qualified does not ensure your ability to qualify at all.

Pre-Approval
A pre-approval on the other hand, is much more detailed. At minimum a credit report is obtained but sometimes that’s all. So there could still be several assumptions made regarding your income, etc. In most situations a pre-approval is just an approval subject to certain conditions. The fewer the conditions the more valuable the pre-approval.

These conditions could consist of:

* verification of employment and income
* verification of down payment money
* acceptable appraisal
* acceptable title
* etc, etc, etc.

The key is to have as little conditions to final approval as possible. Getting pre-approved before shopping for a home is the best thing to do. It will speed up the settlement process once you do find a home and give you more leverage when negotiating the sales price. And, by going through the pre-approval process, you can uncover any obstacles that may prevent you from buying the home of your dreams.

Never assume that your credit is fine and your income sufficient. Two out of three credit reports have some type of error on them and there are specific guidelines used when qualifying income. If you work overtime or receive commission/bonus income or are self employed, you may not be able to get all of your income qualified under standard mortgage guidelines. So don’t take any chances and get pre-approved first. It’s a fairly simple process and you’ll be far better educated about your options allowing you to make better decisions when the time comes.