Prequalification calculates the amount you can borrow based on a largely informal assessment of your finances. Pre-approval is heavier and requires documentation. Prequalification and pre-approval seem similar, but in general, only pre-approval allows you to stay ahead of the competition in buying a home.
What is mortgage prequalification?
Typically, the prequalification phase involves describing your loans, debts, income, and assets, although application processes vary depending on the lender. Based on this overall financial picture, the lender estimates how much you can borrow. Some lenders also perform a credit check. You can pre-qualify by phone, online or in person.
By pre-qualifying, you can get a feel for your financial preparedness and learn about the different mortgage options. Often, this is a good decision for first-time buyers who are just testing the water and are not ready to participate.
What is mortgage pre-approval?
Pre-approval of a mortgage takes the process to the next level. For pre-approval, you will need to demonstrate your track record and financial stability. The lender examines your income, employment, assets, and debts, as well as your credit report.
You will receive information in the form of a W-2, an up-to-date payslip, a summary of your assets, and total monthly costs and if you already own real estate, a copy of your statement. mortgage and your home insurance.
If you qualify, you will receive a pre-approval letter detailing the amount and type of mortgage the lender is willing to offer as well as the terms and conditions. You can show the letter to sellers and their brokers during home auctions.
A pre-approval offer is not a guarantee, but it does show that you are a serious buyer, which can give you an edge in a highly competitive market.
Pass prequalification and get pre-approved?
You don’t need to be prequalified beforehand. If you know that you are financially ready to buy and want to shop at home, you can skip prequalification and request pre-approval.