What is the difference between a mortgage pre-approval and a pre-qualification?

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Mortgage pre-approval vs. pre-qualification

A mortgage pre-approval and a pre-qualification may sound similar, but there’s one big difference: one will help you buy a home, and the other will make you laugh at an open house.

A pre-approval means something: your lender has reviewed your income, assets, and credit to see what you can afford.

A pre-qualification is based on what you have said verbally to your lender. No tangible proof of your financial situation has been provided.

Here’s why you need one pre-approvalnot a pre-qualification.

You need pre-approval to buy a house

In today’s market, salespeople are picky. Even though the competition cooled off at the end of 2022, there are still only 1.28 million homes on the market in the United States, up from more than 2.2 million before 2016, according to the National Association of Realtors.

Many sellers are hoping for a cash buyer. If they don’t get one, they look for a qualified mortgage buyer. And they only know if you qualify if you provide a pre-approval – a full mortgage loan approval in which the lender has reviewed everything except the property.

In other words, the lender has calculated the income, totaled your assets and made a firm credit application. He looked at your debt-to-income ratio and determined a maximum house price.

It takes time and commitment. Not just anyone can get pre-approved. That’s another reason sellers and their agents need it: it shows you mean business.

But even a pre-approval is just a virtual piece of paper that can be forged.

Phil Ganz, loan officer at Movement Mortgage and creator of MakeFloridaYourHome.com, reports on what’s happening in the fiercest markets.

“In some states like Florida,” Ganz said, “every real estate agent asks for DU or LP,” which refer to the computerized underwriting results of Desktop Underwriter and Loan Prospector, Fannie Mae, and Freddie Mac, respectively.

Ganz said Fannie Mae and Freddie Mac forbid providing the DU and LP result, but “the agents don’t care. You won’t get your consent accepted if you don’t provide it.

In other words, officers verify that the loan officer is not just typing a letter on company letterhead and emailing it.

Don’t have a solid, fully documented pre-approval? Some sellers won’t even dignify your offer with a response.

” Expert Point:Looking to buy soon? Prepare to have your offer accepted on a house in get pre-approved for a mortgage before your housing search.

Why a pre-qualification is essentially worthless

Pre-qualifiers were popular before the housing crisis of the late 2000s.

In the age of loans with no income, no assets, no nothing, why would a loan officer deal with a stack of paperwork?

Nowadays, lending is much stricter. One small detail could derail the whole approval. You would be hard pressed to find a lender to issue you with any pre-qualification at all.

For example, let’s say you are self-employed. You think you make $100,000 a year, but your write-offs mean the lender can only use $50,000 to qualify.

Or, you forget to tell your lender a “minor” detail: a bankruptcy five years ago. Without a credit report, they would never know.

It is only after you receive an accepted offer from the seller that you will find that your “endorsement” is worthless.

Expecting a first-time homebuyer to point out every potential loan problem in their lifetime is akin to your local lawnmower repairman telling Elon Musk how to build a Tesla.

Even if a lender agreed to issue an approval without checking your situation, that piece of paper would only be good for the trash.

Even a pre-approval is sometimes not enough

Pre-qualifiers are already a relic, and pre-approvals may not be far behind.

“Everyone now collects complete documentation at a minimum,” Ganz said. “But if you look at the trend, it’s all going towards cash collateral.”

Ganz refers to programs where an entity will purchase the home for cash on behalf of the buyer and complete the mortgage after closing. These services give the seller the assurance that the sale will happen quickly, even if there is a problem with the mortgage.

real estate startups as HomeLight and Orchard emerge to turn first-time buyers into cash buyers, and lenders are also getting in the game. It seems that every few months new companies offering cash deals with weird names like Zigzy and Knock enter the market, capitalizing on the high expectations of home sellers.

These companies take the idea of ​​pre-approval to the next level: they back their approval with money to give their buyer the best chance of an accepted offer.

It’s time to get serious about buying a home

Get serious about your home buying goals and be prepared to submit your full financial picture to the lender.

A savvy buyer will do this long before they want to buy a house. A pre-approval is the only way to really know what price range you can qualify for.

There’s no point in setting your heart on a certain size, style, or location of a home based on a guess. Know what you can afford, then start looking.

»Expert tip: Thinking of buying a house, but want to get a good rate? Find a lender it gives you the power to lock in an interest rate for an extended period of time so you can comfortably shop for a home knowing your rate is secure and won’t go up. Start here!

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Home inventory rose 27% in September from a year ago, according to Realtor.com

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