Now that you’ve decided to embark on the journey of purchasing your first home, let’s look into the necessary steps required to receive a mortgage. When it comes to mortgages, a good place to start is by learning about the process of pre-qualification and the process of pre-approval. In addition, how do you know when you’re ready to apply for either?
To begin, let’s talk about the pre-qualification step. Although pre-approval and pre-qualification may sound relatively similar, there are some fundamental differences as they both represent different parts of the same process. Pre-qualification begins with providing a clear financial history to give to your banker or lender. This will include your current income, and any assets you may have. It will also require you to disclose any outstanding debt. Once you’ve provided the appropriate information, your lender will decide your eligibility and a potential loan amount. Be mindful, that you may not receive any sort of rough estimation when it comes to an allotted monetary value. Your lender is simply testing your eligibility at this juncture, and is not required to give you an estimate.
Make sure you’re aware of the following when it comes to pre-qualification. Pre-qualification is a less formal process than pre-approval. In the pre-qualification stage, you will not be required to verify any of the information you provide. To be clear, you will need to do this moving forward, but it is not pertinent to getting pre-qualified. Pre-qualification is merely a predecessor to the formal process, and is usually reported using estimates.
All that being said, is pre-qualification necessary? Depending on your specific needs, pre-qualification may not be necessary, but can certainly be helpful. First time homebuyers in particular may want to take advantage of utilizing the pre-qualification process. Usually, first time homebuyers are not positioned to know what their potential mortgage may be. Going through the pre-qualification process may help you conclude whether or not your financial standing is ideal for home ownership.
Now that we’ve established the nuances of pre-qualification, let’s divulge into the pre-approval process. It is important to note that while getting pre-qualified may be useful, it is not always a necessary step to getting pre-approved. The process of pre-approval will require formal documents, and therefore, will be more time consuming. To be pre-approved, you will need to provide important documents such as tax returns and bank statements. Lenders will want to verify this information in addition to getting an accurate credit report and a history of your ability to make payments on time. This may include W-2 forms and/or paystubs. You will be required to make sure all of these documents are official and verifiable.
If you’re approved you will receive a conditional commitment from your lender or banker. This conditional commitment will contain your exact loan amount, in writing. Unlike a pre-qualified estimate, it will be a concrete number that you can guarantee will be provided should you put an offer on a home.
Without pre-approval, you will be looking at a substantially more difficult home buying process. There are various moving parts when it comes to purchasing a home. Sellers and real estate agents alike are looking to maximize their profits. This means, that pre-approved clients will almost always be the smarter choice for home sellers. If you are unable to obtain pre-approval, this will be a potential red flag if the decision comes down to you versus a more qualified buyer. Being pre-approved will showcase to sellers that you are reliable. In a numbers game, it is always best to cover your bases and maximize your appeal as much as you possibly can.
Having reviewed the information, what is the right course of action? To summarize, the pre-qualification process is helpful for determining your financial standing. First time homebuyers may want to go through pre-qual to simply determine if they’re ready to financially invest in a home. A pre-qualification does not however indicate a commitment, however, so if you’re looking for a way to solidify your standing as a reliable buyer, you will likely find pre-approval more beneficial. Pre-approval is an important step toward securing the home you fall in love with. If you’re still unsure of where to begin, reach out to a reputable lender in your area. Based on your specific needs, they will better help you with an appropriate course of action moving forward.