Mortgage Pre-Qualification vs. Pre-Approval: What Homebuyers Need to Know

Woman getting mortgage pre approval online — Photo by Dollar Gill on Unsplash

Military.com

Published April 28, 2021

The 2021 housing market is operating at warp speed. One second, you have five properties lined up that you like, and the next, there’s nothing available listed near your next duty station -- none that meets your criteria anyway. It’s exhausting, it’s disheartening and it’s discouraging for homebuyers. Military home sellers, on the other hand, are toasting with their champagne glasses.

The key, in addition to watching and waiting, is staying competitive. And in the 2021 market, that means getting all your ducks in a row, which, of course, means getting your finances in order. That way, as soon as there’s an opportunity to make an offer, you have everything ready. So let’s take a look at mortgage pre-qualification vs. pre-approval, what those terms mean and why they’re important to you as a homebuyer.

Mortgage Pre-Qualification vs. Pre-Approval

These two terms may sound interchangeable, but they’re not. While one is surface level, the other is an essential part of the homebuying process. But they both boil down to your finances. This will mean taking a close look at your credit score, debt and assets. What this process gains you is not only a healthy budget to work with, but, more importantly, buying power.

What’s the Difference Between Mortgage Pre-Qualification and Pre-Approval?

Mortgage Pre-Qualification

Think of skimming the surface when you hear pre-qualification. A pre-qualification gives you an idea of how much money you might qualify for on your home loan. This ballpark number is based on customer information, not fact checks.

What you need to know about mortgage pre-qualification:

It’s quick! Most are filed online and offer results within two to three business days.
It doesn’t require a deep look into your credit reports.
It’s based on what information you provide the lender. (You can see where there’s room for error.)
It doesn’t tell you how much you’ll be pre-approved for.

Mortgage pre-qualifications are best used to start your house-hunting, not to place an offer on a home. A pre-qualification doesn’t carry much weight with the seller, especially in a seller’s market. This is why you need a mortgage pre-approval.

Mortgage Pre-Approval

Unlike a pre-qualification, the mortgage pre-approval is based on an extensive look into your finances.

Your mortgage pre-approval is based on:

A completed mortgage application.
Your credit history.
Your finances.
An estimate of your down payment.

With no stone left unturned, your lender can provide you with a specific amount that they’re willing to lend you. What’s more, they’ll include an approved interest rate. This should help you finalize a budget and narrow down your house-hunting.

More importantly, this letter gives you an edge in a tough market as it confirms (rather than estimates) how much money you’re good for. Because of that and the fact that you’ve already started the process, the whole transaction should move a little faster -- great news for military families working with a set PCS timeline.

4 Steps to Getting Pre-Approved for a Mortgage

1. Build a Good Credit Score.

It’s no secret your credit score holds all the cards when it comes to financial transactions. It conveys to the lender how well you are at borrowing money and paying it back. As a lender, it’s a crucial part of determining who’s worthy of a loan. Your credit score isn’t random. These are the key factors that make up yours.

35% -- payment history.
30% -- credit utilization.
15% -- length of history.
10% -- types of credit.
10% -- new credit.

The VA home loan typically requires homebuyers to have a credit score of 580-660, and the requirement often increases when you look into conventional home loans. If your credit falls below this mark, then it’s time to figure out why so you can start the credit rebuilding process.

Rebuilding your credit score looks like this:

Dispute errors on your report.
Carry less than your limit on your credit card.
Increase your credit limit.
Pay your bills on time.
Become an authorized user on another (financially responsible) person’s account.
Call your creditor.
Pay off debt.

2. Set a Budget.

Your pre-qualification amount is not your budget! Even if a lender says that you’re approved for $500,000, it doesn’t mean that you actually can afford it. Here’s why. Although your debt-to-income ratio might support a heftier home purchase, the lender is not involved with your personal life. Only you can determine how much is an appropriate mortgage to pay when you’re saving for retirement, increasing your investments, helping a friend or family in need or saving for your children’s college education.

3. Gather Documentation of Your Assets.

This step is all about proving your worth. The lender needs to see that you have the funds to make the down payment, cover closing costs and afford private mortgage insurance (PMI) should you choose to forgo the VA home loan. Take stock of these assets:

Cash.
Physical: tangible items like property, cars, jewelry, art, etc.
Non-physical: 401(k)s, IRAs, stocks, bonds and royalties.
Liquid: items that are easily traded or sold for cash.
Fixed: furniture and antiques.
Equity: ownership of businesses, stocks or mutual funds.
Fixed income: investment funds lent in exchange for interest.

4. Prove that You Have a Steady Income.

To obtain a home loan, not only do you need to prove that you’re a financially responsible adult who intends to repay your loan within the set parameters, but you need to convey that you have a steady income. For military members, this means having your leave and earning statement (LES) at the ready.

As a potential homebuyer, paying attention to your finances before applying for a home loan can help each component come together, which can make for a smart and successful home purchase.