If you’re in the process of buying a home, you may have heard a lot of new words thrown around. There are tons of terms you may not be familiar with like “pre-qualified,” “pre-approved,” and “approved.” Before getting into home buying, you’ll want to know the difference between these three terms.
It can be confusing to try and figure out the difference between pre-qualified, pre-approved, and approved for a home loan. Each one of these is slightly different. This article breaks down the differences between these terms so that you know exactly what they mean.
- What does Pre-Qualified mean?
- What does Pre-Approved mean?
- What’s the difference: Pre-Qualified vs Pre-Approved?
- Should you get Pre-Qualified for a loan?
- Do you need to get Pre-Approved for a home loan before buying a house?
- What does Approved for a home loan mean?
- What’s the difference between Pre-Approved vs. Approved?
- How do you get Approved for a loan to buy a house?
- Once you’re approved, how do you close on a house?
- Learn more about buying a house from a trusted real estate advisor
What does Pre-Qualified mean?
Pre-qualification is the first step in the home buying process. It’s a quick way to get an idea of what you can afford and how much house you can buy.
Pre-qualification is usually done through a mortgage loan officer at a bank, credit union, or lender. They’ll look at your income, debts,and other factors. From that, they’ll determine how much money you can borrow and what kind of payment you can afford.
When you’re pre-qualified for a mortgage loan, the mortgage officer will have some information about your financial situation. But they won’t have all of it. They may not know your exact credit scores or how much debt you have. When getting pre-qualified, you usually provide the financial information to the loan officer yourself.
Once you’ve been pre-qualified by one lender, you can shop around for the best rates. Be sure to look at other lenders to compare their fees and services before choosing which one to work with. This will be important further down the line when it comes time for actual approval.
What does Pre-Approved mean?
Being pre-approved means that you have been evaluated by a lender and have been approved for a specific amount of money. The lender has reviewed your financial information, including your income and credit history. Then they have determined that you meet their criteria for borrowing money.
This process typically involves a lender gathering information from other sources. They will find out about your income, assets, debts, and credit history. This helps them to determine how much you can afford to borrow.
Once you are preapproved, you will receive a letter from the lender. The letter states that you’ve done this assessment and the bank is willing to lend you a certain amount of money.
When you’re ready to start looking for properties, you’ll be able to show the owner or agent this letter. It shows that you have already been pre-approved for a certain amount of financing. And you can show that you can get a loan for the price of their property.
This helps speed up the buying process and ensures that you don’t waste time looking at homes outside your price range. You’ll also be able to negotiate more confidently on price because you know exactly how much you can afford.
What’s the difference: Pre-Qualified vs Pre-Approved?
When you apply for a home loan, you’ll get one of two responses: pre-approved or pre-qualified. Even though people sometimes use these terms interchangeably, they aren’t the same thing. So it’s important that you know how they differ.
When you get pre-qualified for a mortgage, the lender will look at the information you give them. They’ll ask about income and debt level. And they’ll try to determine whether or not they think you are capable of making payments on a home loan.
The lender won’t actually make a loan commitment at this point.
Being pre-qualified is less relied upon by buyers because it’s based only on what you tell the loan officer. But if you’re upfront about your finances, getting pre-qualified can help you know what you can afford.
Getting pre-approved takes the process further by running those numbers and determining exactly how much money you qualify for. When you’re pre-approved for a mortgage, the lender does outside research. Then they determine how much cash you can borrow based on your credit score, income, and debt.
This will let you know just how much home you can afford before even starting your house hunt!
Should you get Pre-Qualified for a loan?
A pre-qualification letter gives you an idea of how much money you can borrow and what your monthly payment will be. It also includes an interest rate estimate based on the information you provided during the application process.
Getting pre-qualified is free and takes only minutes to complete. You’ll need to provide your income and expenses, as well as some other personal information (such as marital status). Once you submit the application, your lender will review it. Then they will give you an estimate of how much money you might be able to qualify for.
Pre-qualification is not required for applying for a home loan. However, it’s highly recommended because it gives you an idea of how much house you can afford. This is good information to know before going through the full application process.
If you already know which lender and mortgage product you want to use, then pre-qualifying is unnecessary. However, usually, there are several lenders that offer competitive rates. If you aren’t sure which one suits your needs best, then getting pre-qualified could save time and money. Getting pre-qualified by eliminating unrealistic options from consideration right away.
Do you need to get Pre-Approved for a home loan before buying a house?
Yes, you should definitely get pre-approved for a home loan before buying a house.
If you’re in the market to buy a home, it’s important to know your financial situation. That way, if something goes wrong during the buying process, you’ll be prepared.
A pre-approval means that your lender has already checked your credit report and other financial history. And it shows they’ve determined how much money they can lend to you based on what they see. This is a more conclusive step than being pre-qualified. When you’re pre-qualified, a lender will look at your credit report and run some numbers. But he or she hasn’t actually reviewed your financials yet.
Getting pre-approved helps establish credibility with sellers and their agents. And it can help cut down on the time it takes to close on a home purchase. It also makes it easier for buyers who are competing for homes in hot markets. Where multiple bids are common, sellers often prefer working with buyers who have already been pre-approved by lenders. This is because they know they can close on time if they decide to accept an offer from you.
What does Approved for a home loan mean?
Approval is when your lender says you can actually borrow the money. Being approved for a home loan means that you have been deemed by your lender to be a worthy borrower. This is based on the information provided in your loan application.
When someone is approved for a loan, it means they meet all the conditions of the loan agreement. It also means they can take out the amount of money they want to borrow. If you’re approved, you can then go ahead and buy your home. If you aren’t approved, it means that for some reason your lender doesn’t think you can afford the home. (This can happen even if you’re pre-approved, though it’s not likely.)
Once you’re approved for a loan, your lender will send an approval letter. This makes sure everything about the loan is correct and up to date. The letter will also contain information about the type of loan and interest rate that you and the lender agreed upon.
What’s the difference between Pre-Approved vs. Approved?
Once you’re into the home-buying process, you’ll need to know the difference between being pre-approved and approved for a loan. If you’re wondering what the difference is between pre-approved and fully approved, here’s how it works.
When you get pre-approved for a mortgage or loan, you are demonstrating your ability to repay the loan. You are providing proof that you have enough income to make the monthly payments on time. And you have proven that you have sufficient assets (e.g., savings) to cover the down payment and closing costs. Once this is established, lenders will generally give you an idea as to how much they can lend you. This is based on their guidelines and policies.
Approved means that an actual lender has said yes, they would like to lend money to someone with your credit history and situation. When a lender approves you, they have looked at your assets compared to the house you actually want to buy. And they have approved a loan for the purchase amount of the house.
How do you get Approved for a loan to buy a house?
To get approved for a loan, the first thing you need is a good credit score. If you have a good credit score, getting approved for a mortgage loan is usually not too difficult. You may even be able to negotiate better terms with the lender to get lower interest rates and/or fees.
If you’re planning on buying a new home, the lender will want to see proof of funds for the down payment and closing costs.
Many of the steps between pre-approval and approval are the same. However, receiving final approval means that you can actually have the funds to purchase a home. At this point, you will need to have already put in an offer on the home you want to buy. Your loan officer will need to see the purchase agreement and proof of your earnest money deposit.
Once you’re approved, how do you close on a house?
You’ve picked out your house, and you’re approved for a loan. Now what?
Start by obtaining a mortgage commitment from your lender. This is an official document from your lender stating that you’re approved for a specific amount of money. It also includes details about the interest rate, down payment, and other costs associated with your loan.
Obtain anof the home you want to buy. The will determine the value of the home and make sure it meets certain requirements set by your lender.
Have the property inspected by licensed professional inspectors — usually, two or three are recommended — to make sure there are no major problems with the house that could cost you money later on.
Learn more about buying a house from a trusted real estate advisor
Buying a house can be a confusing and complicated process. Knowing the difference between pre-qualified, pre-approved, and approved will definitely help. But it’s not part of the process that’s hard to navigate. Finding an expert, reliable real estate agent can save you more than just a headache when buying a home. They will help you navigate the entire process, saving you time and money.
Finally, one of the most important things you can do when buying a home is to ask questions! You’ll have several opportunities throughout this process to ask questions about anything that may seem unclear or confusing to you. Always feel free to ask about anything you don’t understand – including how much documentation is needed or what specific steps need to be taken.