If you’re thinking of purchasing a new home, you’ve undoubtedly heard these mortgage industry terms: pre-qualification and pre-approval.
To ensure the details of the loan align with the objectives of the buyer as well as with the lender’s rules, it’s important to have a clear understanding of these financing tools.
Considered by most experts to be the first step in the home-buying process, pre-qualification is typically an early conversation between the buyer and lender to discuss income, debt, assets, sales price, payment levels and down-payment. It is also an opportunity for buyers to ask questions and discuss goals.
“The pre-qualification is more of a basic application where we take a look at items such as the type of loan, income levels and credit scores,” said Chad Stallings, a mortgage banker with Arizona Mortgage Specialists. “It’s also a chance for us to identify objectives and determine how we can get the buyer to where they want to be.”
Pre-qualification applications are available online but can also often be completed over the phone or in person. Based on the information provided, an estimated mortgage amount will be generated and provided to the buyer.
The pre-approval process is more involved, taking the loan process much further by requiring that buyers provide financial items such as W-2s, paystubs and information regarding any gifted funds. In addition, tax returns, bank statements and other supporting documents will be scrutinized. Sometimes things are uncovered in the pre-approval process that may cause an issue with the loan.
“For example, borrowers may not be aware that unreimbursed employee expenses on the Schedule A of a tax return needs to be subtracted from the monthly income,” Stallings said. “This could change a borrower’s debt-to-income ratio and qualification for the loan.”
Unlike pre-qualification, pre-approval requires a credit check — which is typically good for 90 days — along with a complete review of all financial documentation. All of this is then submitted to the lender’s underwriter who will do a final review before a pre-approval can be issued. Generally, a prospective buyer can expect it to take approximately 24 to 72 hours for the review and pre-approval notification.
“During the pre-approval process, all of the documentation is verified so the whole picture is clear,” said Allen Studebaker, a realtor with HomeSmart Elite.
The bottom line
Industry experts recommend that prior to shopping for a new home, serious buyers should have an informative discussion with a lender to learn about loan benefits and identify any potential issues. They should also undergo a mortgage planning session so there is a clear picture of their financial parameters, including any financial restrictions.