Pre-Approved vs Pre-Qualified
Many Central Texas buyers think once they’ve been pre-qualified by a lender for a loan they are pre-approved for a loan. Unfortunately there’s a huge difference between being pre-approved and pre-qualified.
What is being Pre-Qualified?
Getting pre-qualified by a lender is a fairly simple and its the first step in the loan process. You start by providing a lender what your debt, income and assets are. This is an informal process is usually handled over the phone, by email or through a form on a lender’s website. Pre-qualifications may not include a view of your credit or even an evaluation of your actual ability to purchase a property.
Since a pre-qualification is based only on information that you provide a lender, your pre-qualified amount is not set in stone, it’s just an idea of what you may qualify for based on what you provided a lender. In this process you usually do not provide supporting documents such as W2s, tax returns, bank statements, etc. It’s for this reason a pre-qualification does not carry the same weight as being pre-approved.
What is getting Pre-Approved?
Getting pre-approved is a much more involved process. A lender will require a borrowers entire financial picture. A borrower usually starts by completing a loan application. The lender provides a list of documents they will need to review, such as W2s, two years of tax returns, pay stubs, bank statements, investment account statements and if it applies, divorce information. A credit report will also be pulled and your credit rating reviewed. With this information the lender will do an extensive check of a borrowers financial background and their ability to buy. Once the review is complete a lender will be able to tell a borrower a specific loan amount they can be approved for.
After a lender review is completed you’ll have a good idea of the interest rate options available to you. You also may be able to lock-in a specific interest rate. Once pre-approved you’ll receive a pre-approval letter that usually states an amount you are pre-approved for. An offer from a pre-approved buyer lets a seller know you are financially capable to purchase their property. A pre-approval also gives you the upper hand over other buyers who are not pre-approved by making your offer look much more attractive to a seller, especially in multiple offer situations.
The Bottom Line.
It’s well worth the extra effort to get pre-approved by your lender. The additional work required on the front end for a pre-approval would have been needed at some point anyway, so why not enjoy the benefits of being pre-approved prior to your property search? Know your budget day one and get pre-approved prior to starting your Central Texas land or home search.