I am asked many times what is the difference between pre-qualification and pre-approval and why do I need to have one or the other?

Let’s start with what is the difference.

Pre-qualification is the starting point in your search for mortgage financing. A quick snapshot is taken which includes income, existing debt, savings, length of employment, etc. All of these factors will be analyzed to determine your loan eligibility. This is usually done by the loan officer. You are therefore a the mercy of their experience and best judgement. But the truth of the matter is that most quality Realtors will not even except a pre-qualification when presented with the offer. And if they do, they will want to know who the loan officer is and their experience.

Pre-approval is WRITTEN documentation that shows you have the support of a lender who is willing to finance you. It means that not only have you collected all the pertinent information mentioned above, and backed it up with documentation, but you have also run the credit report and had an underwriter (someone who approves or denies the loan) review the loan application. Based on you income, debt ratio and savings, the underwriter provides the dollar amount you are eligible to borrow. Now you can shop around for a house that fits into your loan approval. Most importantly you will be able to make an offer with confidence and the Realtor will know you have a serious approved buyer. If you do not  have a pre-approval, most Realtors will not accept your offer. Why, the last thing they want to do is tie up their clients home (the seller) for 30-60 days and then have it fall out of escrow only to start the marketing process over.

If you are thinking of buying a home, you MUST at the very least get a pre-qualification to know what you are qualified for and know what your payments will be. After obtaining the pre-qualification, then next step is to get pre-approved to let everyone know that you are a serious buyer. As a side note, you as the buyer must be comfortable with the mortgage payments on the new loan. One of the reasons for the current state of the housing market is that people were caught up in the housing craze and ended up buying to much house. The bottom line is you are the one who is making the mortgage payment and you are the only one who knows what your comfort zone is.

What does it cost to get pre-approved? Pre-approval is FREE. You absolutely have nothing to lose and everything to gain.

So if you are in the market for a home, whether it be your first, second, or an investment property, seek out a mortgage professional to help guide you through the process and advise you or what you can qualify for. For information on choosing a mortgage professional, see “Shopping For Rates Loan Officer Ventura County” in Home Finance Tips in my category list.