The Importance of Mortgage Pre-Approval and Pre-Qualification
The mortgage pre-qualification and pre-approval process is one of the most important in the world of home buying, and it is important to understand just what these two terms mean. While many people outside the industry use the two terms interchangeably, there is a difference.
Pre-qualification should be the first step for any potential home buyer. In some ways, pre-qualification is a short form of pre-approval. The pre-qualification is an informal process, which often takes place on the internet or over the phone. The lender will simply ask for information on income, debt level and other financial information. Based on the information provided, the lender will give the home shopper an idea of how much money they could lend, and the approximate interest rate, assuming the information provided is accurate of course.
The pre-qualification process requires no credit check; the lender is simply relying on what the potential home buyer says. Therefore, the pre-qualification does not show up on the potential borrower’s credit report.
This means that the pre-qualification process is great for shopping around at different lenders. Since there is no entry on the credit report, you can shop around to your heart’s content with no worries about negatively impacting your credit.
The pre-qualification process is also a great time to discuss your credit with potential lenders, and to take any steps he or she may suggest before the credit check takes place.
After you are ready to start shopping seriously, it is time to get pre-approved. The pre-approval process builds on the pre-qualification process by verifying the information provided. During the pre-approval process, the potential borrower has his or her credit checked, allowing the lender to provide a more accurate mortgage amount and maximum interest rate.
In most cases, the pre-approval process will require that an appraisal be done on the home to ensure that it is not priced too high. There is also generally a clause in the pre-approval contract stating that the lender has the right to decline the loan if the financial condition of the borrower changes significantly from the time between the pre-approval and the closing of the loan.