What’s the Difference? (Part 1)

(Part 1 of 3 posts on terminology that can often create confusion)

Don’t you just hate it when someone you are talking with starts throwing words around that you don’t fully understand?  We certainly don’t want that!  It is important that anyone involved in the purchase or refinance of a home understand the terminology used.  Especially when you consider this information involves not only your personal finances, but also something with high emotional ties – your home.

This series of posts will compare two similar terms but with very different meanings and implications that are used throughout the mortgage process.  This information will hopefully be valuable and not just industry jargon to pepper your conversation.  But either way, we thought you might want to know.

Part 1 – What’s the difference between a “pre-qualification” and a “pre-approval”?

Regardless of which term you are referring to, both words describe a lender’s review of your personal information in order to secure a home loan.  The process is typically used when a borrower is preparing to purchase a home.  (Incidentally, it is highly advised to take this step before you shop for a home, rather than shopping for a loan after you find your dream home.)

The significant differences are:  the amount of effort a lender puts into helping you determine how much house you can afford; and in how much documentation you provide a lender.  A pre-qualification means you have had a casual conversation with a lender and have verbally discussed your financial situation for purchasing a home.  You will only talk about your credit, income and possibly size of down payment.  You are given an opinion of your ability to secure a loan based on a hypothetical situation.

A pre-approval means you have provided actual documentation to verify your income and assets, have had a full credit report run, have discussed various loan options available and have a good idea of how much house you can afford.  You will also know how your home may be financed and what the payments can look like.  In a word, you are an informed buyer.

Gaining a pre-approval has significant advantages to both the buyer and to the seller.  As a buyer you know how to shop, can make an offer with a high degree of confidence and know that you have financing lined up.  Taking this simple step also gives you huge bargaining power over a pre-qualified buyer since your offer is more financially sound.  As a seller you know a pre-approved buyer is serious, prepared to make you a quality offer and you don’t have to worry if the deal is going to fall through.

If you are considering purchasing a home, call one of our Home Loan Specialists today (866-98-AWARE) and let us help you with a pre-approval so you can shop with confidence to purchase your dream home.

Coming soon – Part 2 – What’s the difference between a “pre-paid expense” and a “closing cost”?

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One Response to “What’s the Difference? (Part 1)”

  1. Not all Bones are Worth Barking at « Awareness Home Funding's Blog Says:

    […] other challenge we have heard is that buyers were not properly qualified before they even made an offer on the home.  Unfortunately, many lenders only pre-qualify a […]

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