Most first-time home buyers can't afford a home without a mortgage. When they apply for a mortgage, they must go through the pre-qualification and pre-approval processes. Both processes are mandatory for all people seeking a mortgage.
You can think about pre-qualification as being step one of applying for a mortgage. Pre-approval is step two. Understanding the differences between these two steps and what this means for the home seller can help you be prepared to make an offer on a home you wish to buy. If you're thinking about purchasing a home sometime in the next several months, here's what you need to know about pre-qualification and pre-approval.
Home Buyer Pre-Qualification
When a buyer calls a mortgage lender to apply for a mortgage, the lender will ask the buyer many questions, such as:
- How much money do you make?
- What does your credit score look like?
- Where do you work?
- How long have you been working there?
- Do you have other sources of income?
The answers to these questions and more help the home buyer paint a picture of their financial health and status. The mortgage lender, having no other proof or basis for opinion, assumes the answers to these questions to be true. The lender uses the information they gain by asking these questions to write a letter stating how much the buyer would be approved to borrow, if the answers to the questions are true and accurate.
This letter can be provided along with any offer on any home as proof of the buyer's ability to secure a mortgage and pay for a home. Unfortunately, the pre-qualification process is very relaxed, and requires little digging or verification on the part of the lender. Information the buyer provides to the lender could be potentially inaccurate, which could prevent the buyer from getting a mortgage when the time comes.
Home Buyer Pre-Approval
Pre-approval is a lengthier, more in-depth process. During pre-approval, the home buyer is required to supply proof of the financial information they provided during the pre-qualification process. Financial records including bank statements, pay stubs, savings information and other details are all provided to the lender for scrutiny. The lender uses this information to decide: does the buyer really have the financial wherewithal to pay a mortgage if they are allowed to borrow one?
Sometimes the pre-approval process reveals that the home buyer did not answer the financial questions correctly during the pre-qualification process. In this way, home buyer pre-approval often weeds out many unqualified buyers.
Which One Is Better?
Home sellers are far more impressed with buyers who are pre-approved compared to buyers who are pre-qualified. Pre-approved buyers are buyers who would essentially be approved to get a mortgage if their financial status does not change from the time of pre-approval to the actual home purchase. Pre-qualified buyers, however, have yet to clear a significant hurdle from the lender.
Buyers who are very serious about getting a mortgage and purchasing a home should definitely seek pre-approval from a lender.
What Else Can You Do to Make a Competitive Offer?
Getting pre-approved isn't the only thing that buyers can do to make a competitive offer on a home. Below are some other things that buyers do to make their offer look more attractive to sellers.
- Offer a large earnest money deposit. This shows that the buyer is serious about making a purchase, and is willing to take a risk to show good faith.
- Make the offer quickly. Homes go quickly in a hot real estate market, so getting an offer in quickly can give the buyer a competitive advantage.
- Offer a good rate. This is why it's important to work with a real estate professional who knows instinctively how much to offer.
It's also important for the home buyer to prepare for the home purchase process by checking their credit before applying for a mortgage. This way, they can make any corrections to their credit report before filling out the mortgage application. Buyers who have their financial affairs properly sorted out are often much better prepared to make a purchase, and find the home buying process to be less stressful.
Contact a Lender and Real Estate Professional Today
If you're a Strathmore home buyer who is thinking about purchasing a home, contact a reputable lender to find out more about pre-qualification and pre-approval. Work with your lender all the way through the pre-approval process, so that when the time comes to make an offer on a home, you stand out from other buyers who might not have pre-approval.
Next, contact a reputable real estate professional. A good real estate agent can give more advice to help you be poised to make a competitive offer on a property.