As with many financial moves in life, buying a house can require various financial approvals before the purchase actually goes through. However, there is one step that can come before even pre-approval and can help your home purchase process go more smoothly. Pre-qualification is an important step to home buying and setting up a mortgage that should not be overlooked. So what is pre-qualification, what makes it different from pre-approval, and how can pre-qualification impact mortgage approval in the long run? continue reading to learn more about this process and its benefits.
What is pre-qualification? This is a step of financial planning that takes place before you have even purchased a house. Essentially pre-qualification takes your current financial situation and credit score and makes an estimate of just how much money you can afford to spend on purchasing a home including the amount that you would be able to pay on a mortgage, this does not necessarily need documented proof to be estimated. However, it can help you and banking institutions understand what kind of mortgage you are able to afford and apply for. Now just because your pre-qualification gives you an idea of the “maximum” that you can afford does not mean you have to choose that option, but it is nice to understand your potential range of options.
So what is the difference between pre-approved and pre-qualification? Pre-approval of a mortgage comes when a lender takes a look at your financial information (parts of your pre-qualification information) in a more official and documented form including the verification of assets and income, good credit, employment verification, and other financial records. This official pre-approval step is the determining factor of what mortgage you are able to afford in the end.
How can pre-qualification impact your mortgage? Although the pre-qualification step does not directly impact what your mortgage will end up being, it can help you prepare for and predict the potential offers available to you. Additionally, having the pre-qualification steps completed ahead of time can save you time and possibly some money as well as you will have already gathered the required information for your pre-approval process – the more efficiently this step can be completed, the more likely you are to end up with a mortgage that works for you, this can also help you show sellers that you are making a serious offer that you are able to deliver on.
Calculating and verifying your financial situation using pre-qualification should be the first step when entering into the home buying process, even if you are just starting to look. Having this step complete can help narrow down your options and prepare you for pre-approval for a mortgage on your eventual home.