A Look at Pre-Qualified and Pre-Approved Mortgages

mg_800In my experience helping numerous home buyers – especially first timers – knowing the difference between a pre-qualified mortgage and pre-appoved mortgage is a VERY important. Unfortunately, there is a lot of confusion surrounding the two (probably because they "seem" to be the same thing if you just go by what they're called). 

To help you avoid any unpleasant surprises or needless stress, let me explain the difference between the two in a simple and jargon-free way.

Pre-Qualified Mortgages 

A pre-qualified mortgage is a fairly simple process, and it can usually be done over the phone or over the Internet. You provide a lender (e.g. a bank or other financial-type institution) with a snapshot of your financial picture. This includes your income, assets, debt and other basic facts. The bank/lender then performs a quick evaluation of your potential to get a mortgage, and provides you with a mortgage amount that you’re likely to be approved for. That number may be $200,000, it may be $400,000, or it may be anything else.

You’ll notice that I emphasized certain words in the description above. I’ve done that because they’re VERY important to pay attention to, because that’s where some people become the most confused. Getting pre-qualified doesn’t mean that you’ll actually get a mortgage. It simply means that you probably or likely will, based on the information you’ve provided. But there are no commitments in place.

So if this is really not a “real” mortgage application, then why do people bother getting pre-qualified? Simply, they do it to get a quick snapshot of what they might be approved for. It can therefore give them a ballpark amount that can help target their house-hunting.

Pre-Approved Mortgages

Pre-approval involves a formal application, and your credit rating will be checked. The result of a pre-approval is that a potential lender will give you a specific loan amount, along with a specific interest rate, that you can accept within a specific amount of time (e.g. 90 days) if you choose to do so. 

Of course, it’s also very important for me to point out that even after being pre-approved for a mortgage, you’re not required to go ahead with the loan. You can decide to move ahead with it if you wish, or you can seek pre-approval with a different lender and try to get a better amount/interest rate (more on this below).

Which is Better: Pre-Qualified or Pre-Approved?

The answer to this is simple: pre-approved is MUCH better. Why? There are a few reasons.

Firstly, pre-approval gives you a definite, clear picture of how much of a mortgage you can get. You can then use this information and search for houses that are in your price range. This really helps make things more efficient for you, because you’re not wasting time looking at houses that either above or below your target. On the other hand, a pre-qualified mortgage may be wrong, and you don’t want to find this out after you spot a great home – especially if other potential buyers are pre-approved, and you’re just pre-qualified.

That leads to the other reason why pre-approval is the better option. When you make an offer on a house, sellers are MUCH more inclined to do a deal if you have pre-approval. This gives you a lot of leverage in the negotiation, because you’re basically saying: “if you accept my offer, I have the ability to buy this home.” On the other hand, buyers who are only pre-qualified don’t have this leverage.

Important Pre-Approval Considerations

Now, while I am saying that pre-approval is the right way to do, there are a couple of important things to consider before you get one.

The first is, if you have any dings on your credit rating, you want to repair these BEFORE you go apply for a pre-approval. Basically, you want to have your credit in the best possible shape, so that when a potential lender evaluates your credit report/score, they’ll give you the best possible terms.

The second thing to consider is that you DON’T want to have multiple pre-approvals from different lenders. Yes, I mention that one of the benefits of pre-approval is that you can “shop around” and try and get the best offer possible. But you don’t want to have multiple lenders shopping around for you, because every time your credit report is accessed, the credit rating agencies get a little worried. And if they see that in a short span of time your credit report is accessed by different parties (or even the same party several times), they may actually lower your credit rating!

So what can you do to solve this? Easy: you can work with a mortgage broker, who will access your credit rating only once, and then submit it to multiple lenders. Those lenders then compete for your mortgage, but they don’t have to access your credit score each time. They just access the information that your broker has provided to them. In this way, the credit rating agencies don’t start to worry and they don’t think that you’re a credit risk.

Call me for more information!

If you’re searching for a house, call me and I’ll personally connect you with mortgage brokers within my personal network. These are people who are certified, experienced and ethical. And of course, I’ll make sure that you’re 100% satisfied and that all of your mortgage questions are answered to your full satisfaction. You can reach me directly at 780-709-0811.

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I would highly recommend Chris to anyone looking to buy or sell. He was very pleasant to work with. We were first time home buyers, and he answered our endless questions with patience and care. I look forward to working with Chris again in the future!

- Maria Engel

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