Imagine that you’re ready to buy a home, so you reach out to your local mortgage guy (let’s call him Mort the Mortgage Guy) to see how much you can qualify for.
After a few questions about your income, monthly debts, and approximate credit score, Mort proudly announces that he can pre qualify you for $200,000! You excitedly start your search, find a home you love in a neighborhood that you’ve had your eye on, and are ready to move forward to make an offer.
In order to strengthen your offer, your real estate suggests you ring up Mort and request a fresh copy of that pre approval letter. After all, you want the seller to have confidence that you are a qualified buyer because this house is hot and there are other offers getting ready to pour in!
“No problem,” you say.
After a quick call to Mort, he suggests moving forward with pulling your credit, and asks for some basic financial documents from you (W2s, bank statements, etc.).
Again, “No problem” you say – he pulls your credit, and you send over the necessary documentation.
Mort calls back in a few minutes, but this time his tone has changed a bit. “We might have a hiccup,” he says. “You told me Credit Karma had your credit score at 670, but when I pulled it myself it’s actually a 619. Credit Karma is just an estimate, and unfortunately in this case it estimated high”.
“And one other issue,” Mort says. “I didn’t realize you are paid a salary and commission. There may be some extra documentation needed on your commission income before I can issue that pre-approval letter”
You thought you were pre-approved for $200k.
“That was actually just a pre-qualification,” Mort elaborates. “It was based on the information you told me over the phone at the time. Now that you are ready to make an offer, we really need to do a full pre-approval.”
Ugh. The wind is effectively gone from your sails. While you sort out the details of your credit and income with Mort the Mortgage Guy, that dream house goes under contract to another buyer. While Mort thought he was making life easier for you by only requesting a small amount of information upfront, he actually created a bigger mess in the end.
At OVM Financial, we help our clients avoid disappointments like this.
Unlike Mort the Mortgage Guy, our Loan Officers take the time to educate you on the importance of getting all required documents in early, help you get pre approved, and make your loan process as smooth as possible.
While the terms pre qualification and pre approval are sometimes used interchangeably, there are important differences between the two and it benefits a potential buyer to become very familiar with them.
Here are some of the main differences:
|Pre Qualification||Pre Approval|
|How do you get it?||Quick conversation||Detailed conversation and documents|
|Credit pull? (y’n)||Maybe||Yes|
|Is documentation needed? (y/n)||No||Yes|
|What it gives you||A rough estimate||Accurate approval amount|
So- which is better?
As in the scenario explained earlier, there are definite drawbacks in only choosing to get a prequalification. These include:
- Having to rush to get documentation later on in the homebuying process
- Not being taken seriously by Real Estate Agents in your home search
- Potentially missing out on your dream house because you are behind in the process and another buyer makes a strong offer
- Finding out that you are preapproved for less than you thought when you start looking at homes
- Discovering late in the game that your credit needs a bit of TLC to improve your score and purchasing power
By opting to move ahead and get pre-approved, you’ll know how much you can afford to buy, you are better prepared to move forward when you find a home you love, sellers will know that you are serious about your offer, and you’ll be better equipped to make the best financial decision for yourself and your family.
You will need to give your mortgage lender more information and documentation upfront than with pre qualification, but if you’re ready to find your next home, heading straight to pre approval is by far your best option.
Are you interested in learning about how much home you can afford? Follow the link to get started!