Many prospective home buyers and investors mistakenly conflate the terms “pre-qualification” and “pre-approval”. While both of these terms apply to the process of purchasing property, they are not the same thing. While both are necessary steps in the process of obtaining financing for a home, they each require unique information from potential buyers and involve a different series of steps.
What is Pre-Approval?
The pre-approval process occurs after pre-qualification. This step will take a bit longer as it involves a more in-depth study of a buyer’s financial history. In this stage, buyers are required to fill out an official home loan application with a specific lender who will then order and analyze that buyer’s credit reports. This stage will often require copies of bank statements, tax statements, pay stubs and other documentation as proof of income. While pre-qualification merely provides an estimate of the loan amount, pre-approval provides a specific number (and in many cases, also a specific interest rate) to which both the lender and the borrower can commit if desired.
Pre-Approved Mortgage Amounts
The pre-approval process will give potential buyers a better idea of what kinds of homes they will be able to afford. In light of this, most borrowers hope to be pre-approved for a large loan, since that increases their options, but a reputable lender will not offer a mortgage that exceeds what a borrower can truly afford. The goal is to keep annual mortgage payments at less than 30% of annual income. As with pre-qualification, pre-approval is granted based on a good credit history and minimal amounts of debt. Thus, if you are in the market for a property investment, financial responsibility is key.
Some potential buyers opt out of the pre-qualification process, since it serves as more of an instructive process rather than a productive role in the home buying process — a kind of financial reconnaissance, if you will. Yet it is a good idea to follow through with both of these processes, not only because pre-qualification is fairly quick and easy, but because it can help buyers and investors a helpful preview of how the pre-approval process will turn out.