Ah, the age-old question! These two terms have been confusing home buyers for years, and while they sound like the exact same thing, they’re actually worlds apart. In fact, the difference between them could derail your chances of buying a house!
We’ve talked before about why it is vital to get a pre-approved mortgage, but let’s take a closer look at what a pre-approved mortgage is, and why it is infinitely preferable to a pre-qualified mortgage.
What Does “Pre-Qualified” Mean?
When searching for a mortgage, the first step is to get pre-qualified. The important thing to remember is that it’s not the only step. It’s more of a first date, not a wedding ceremony.
When getting pre-qualified, you give the bank an overview of your finances: your debt, income, and assets. They’re not looking at your credit report, or conducting an in-depth analysis of your capacity to purchase a home. The process is simple enough that it can be done over the phone or on the internet, and it is usually free.
From this information, the lender will be able to give you an approximation of the mortgage you would be able to afford. However, this is only a guess and is highly subject to change based on a more comprehensive investigation into your finances. A pre-qualified mortgage is also not a promise. The lender has, at this point, made no commitment to lend you money for your new home.
The benefit of getting pre-qualified is that it gives you an opportunity to talk with your mortgage provider, and discuss any concerns you might have about getting a loan, as well as what your overall financial goals are. This is a useful step for most buyers, which is why it is recommended to get pre-qualified as well as pre-approved for the mortgage you want or need in order to purchase the home you have in mind.
On The Other Hand… What does “Pre-Approved” Mean?
When beginning the pre-approval process, the lender will now take a much closer look at your financial position, including an analysis of your credit score. Once the necessary paperwork is complete, the lender will be able to tell you the exact amount of money you will be approved for, and will give you an idea of the interest rate you will be paying once everything is a done deal. Most of the time, the interest rate is still subject to change, but some pre-approvals will lock in a fixed interest rate.
The most valuable part of a pre-approved mortgage is that it is a commitment. So long as certain conditions are met, the bank is agreeing to lend you the money once you find a suitable house. This means that you can shop with ease, and find the perfect home that matches your financial situation.
Why Does This Matter?
Oh boy, it matters. While pre-qualification has some benefits before you start looking for a house, it is practically worthless once you start shopping, at least in terms of helping you secure your dream home. Prospective sellers are much more likely to deal with someone who has a pre-approved mortgage, over someone who simply has a pre-qualified one. In today’s fast moving real estate market, where multiple offers are made on many homes, it is critical to be the most reliable choice in order to have a leg up on the competition. A pre-approved mortgage can help ensure that your offer is well-considered by the seller.
The danger with confusing the term pre-qualified with pre-approved is enormous. If you make an offer under the impression that your financing is guaranteed, only to discover at the bank that a pre-qualified mortgage doesn’t guarantee anything, you could face numerous financial consequences if you place an offer and then don’t have the financing to go along with it. Legalities aside, you’ll also put yourself out to the opportunity of being heart-broken about not being able to move into the dream home you had fallen in love with. Without funding, you will probably lose the house you’ve spent months looking for, as well as the deposit you’ve made, and could even face legal action depending on the overall scenario.
Know and understand the difference to avoid this disastrous situation. Get pre-approved, not just pre-qualified!
Navigating the confusing terminology of home ownership is a struggle for most of us, and there are many other technical pitfalls to dodge before confidently securing a mortgage. When working with my clients to obtain financing, I am committed to giving them the fullest possible understanding of their mortgage options along with the best rate for their specific financial situation. If you’re thinking about acquiring a mortgage or perhaps are looking at refinancing your existing mortgage and want to know where to start, feel free to give me a call at 705-315-0516. I will make sure to clarify any questions you might have about pre-qualification, pre-approval and every other stage of the mortgage process, so that you can avoid the minor mistakes that might have major consequences, and feel confident about your financial decisions and future.