What’s the different between pre-qualification and pre-approval? Well, when I sold my last property, and the buyer’s agent called me to schedule the showing, she said “I have a buyer who is approved. She needs to move within 2 weeks, so she’s going to decide on a house this weekend. If she makes an offer on your house, could you move within those 2 weeks?”
This was certainly a good situation to be in as a seller. And as a buyer, do you realize how much power this gave her?! I was beyond excited to hear the buyer was serious. She GOING to make a decision in the next few days! So when I got the offer, I treated it like GOLD. When we went through negotiations, I remembered that the buyer was ready and going to purchase SOMETHING. This pretty much put the buyer in the driver’s seat with me. I share this story so you can understand that when you’re looking at houses, submitting offers with a STRONG pre-approval gives you such an advantage.
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What does it mean to be pre-Qualified?
I consider getting pre-qualified like the dating phase. The other person thinks you’re cool to hang around and wants to get to know you better. You don’t have “titles” yet, but you’re headed in the right direction. In fact, if things check out, you’ll be exclusive with each other. You’ll officially start calling each other boyfriend or girlfriend in no time.
Pre-qualification is the first step where the bank takes a look at your overall financial picture, at a high level. They look at your income, debt and assets and will tell you the size of the loan you qualify for….that is, the size of the loan you COULD get. You can get pre-qualified over the phone or internet and it’s typically free.
I wouldn’t get too confident with these numbers, though. All of this can change after you go through the approval process, and then the final approval process.
What does it mean to be pre-Approved?
Pre-approval is basically moving to the boyfriend/girlfriend stage. You’ve filtered out the crazy, and you’ve decided that this is the one person you want to continue to get to know. You take them home to meet your parents, your friends get to know him on a first named basis (he’s graduated from “the guy you met in college” to “John”). Things get a bit more serious as you spend time together getting to know each other better.
For the pre-approval, you’ll need to complete an application, and pay a fee to have your credit pulled. After this is done, the lender can tell you the interest rate you’re approved for. You’re moving from an “estimate” towards a “sure thing”, but you still don’t quite have the keys in your hand just yet. This step is still important because gives agents and sellers confidence that you’ll be able to get a loan once you find the right house.
From an agent’s point of view, there’s nothing worse than showing a perspective buyer house after house, to just realize that they can’t actually afford the houses they’ve been looking at. And the seller wouldn’t be too happy knowing that the “buyers” looking at their house can’t actually afford to buy it. I’m sure going through the home search process when you’re not really approved can end up being frustrating to you too.
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Why the Pre-Approval’s so Important
Let picture this, you’ve been looking at houses for the last few weeks and finally found the perfect one. You go through the negotiations and are under contract, have written the check for the deposit and told all of your family and friends. Then you call your lender to confirm the financing and give him the address to get the ball rolling. After checking going through the approval process the lender tells you the bad news… you don’t actually qualify for the house.
In fact, based on your credit score, you’re going to need a lot more money down than what you thought. So now you’re probably in tears, and you have to call your agent, who has to call the seller’s agent and try and get your earnest deposit back. The seller has to put their house back on the market and you’re left explaining to your friends and family what happened with your “dream home”. Okay, let’s move on from this onto something more positive – the final approval or commitment, as it’s sometimes called.
The last step is the loan commitment, aka the engagement – and this is as detailed as it gets. You may not be at “til death do us part” yet, but you’re making all the plans. You’ve found the perfect home. Now you, the buyer, are approved to buy a specific property with the specific address.
This is the time where you’ll spend a great deal of your time packing and sending updated income and bank statements to your lender. You might need to write a letter to explain a financial infraction in your past. This is planning time for you and your lender. The bank will send an appraiser to the house and it needs to appraise for the loan amount. Some sellers (mostly new home builders) require an actual commitment letter from the lender. However, most of the time the “no news is good news” philosophy is how this part of the process works.
Celebrate Good Times
As you get closer to the closing date, a lot of people celebrate by purchasing a new car, new furniture or putting additional items on their credit card, but I beg you. DON’T DO THIS! You want to keep your credit clean – no new loans, no new debt, not even a new credit inquiry. And you don’t want any funny business going on with your checking or savings accounts either. You want to keep your credit score high and you want to want to keep your payments current, and money in the bank. Point blank, don’t do anything too drastic with your finances. Any large and unusual sums of money going in our out of your accounts should be avoided.
What’s the different between pre-qualification and pre-approval?
So what’s the difference between pre-qualification and pre-approval? All in all, pre-qualification is based on the information you give. Where the pre-approval is based on the information the lender has verified. Once you’ve made it through all the tough stuff and you’ve satisfied all requirements you’ll get to closing. You make promises and sign away on the dotted line and you get the keys to your house like you’d get a ring on your finger.
I’ve heard a story or two about things people have done that jeopardized or ended their chances of getting approved for a loan. Have you heard of any stories that we can learn from? Please share. Sharing is caring.
1st Night in New Home Checklist
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- What Every Buyer Should Know Before Writing an Offer On a Home
- 10 Ways to Know If You’re Buying the Right Home
- How Much House Can I Afford? Dave Ramsey Style
- How to Save for a Down Payment on a House
- 13 Things I Wish I Knew Before Buying My First Home
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