Pre-Qualifying and Pre-Approval

When young couples get married, their biggest dreams are usually to buy a home and raise a family. They immediately begin saving money for their dream home while looking at homes every spare minute they have. After a lot of saving and searching, they've finally found the home of their dreams. Next, all they have to do is go to the bank and get a loan, and the home will be theirs. At least, that's what they thought until they got to the bank and were unceremoniously turned down because the bank felt that the price of the home was too high for them to handle. Disappointment and heartache like this can be avoided by pre-qualifying or being pre-approved for your mortgage.

Getting pre-qualified for a mortgage is a good idea so you know where you stand when you begin looking at homes to buy. You'll know ahead of time how much money the bank is willing to give you, and that will let you know what price range to stay within. The bank will base their decision on preliminary information you give them. Many consumers think being 'pre-qualified' and being 'pre-approved' are the same thing, but nothing could be further from the truth.

When you go to the bank to speak with a lender about pre-qualifying, you submit all the details of your past and current credit history, your employment, income and debts. The lender will usually take it at face value and not verify the facts at this point. Based on the information you've given, the lender will pre-qualify you for a certain amount. Pre-qualification can take place very quickly, but it's important to remember that the price is not set in stone.

On the other hand, when you go to the lender for a pre-approved, the lender will look at all the information on your credit application and attempt to verify the facts given. They'll order a credit report to take a look at your credit history. Your credit report will provide a snapshot of how many debts you have and how you've handled them in the past. The lender may also verify your employment, as well as any bank accounts that you claim to have. If the verifications check out, the lender will usually pre-approve you for a certain amount. If your credit isn't as good as they'd like or your employment is shaky, they may decline your loan or approve you for a lesser amount, even if you were pre-qualified.

One major factor that lenders look at when determining qualification and approval is your debt ratio. This is a measure of the percentage of your income that goes toward paying all of your debts. Banks have certain percentages that they use when determining eligibility for loans.

It's important to at least be pre-qualified when you begin to look for a home to buy so that you'll have a good idea of just how much home you'll be able to purchase. A full pre-approval is even better. With these, you'll save time by knowing what's within your price range, and sellers will generally take your offer more seriously, as well.