Many homebuyers remain confused between pre-approvals vs. pre-qualifications when it comes to mortgage lending. Both terms are often used interchangeably, but the truth is that they are very different from one another. Here's a look at the differences between the two so you can get a clear perspective on which one to use. You'll also learn what each term means when it appears on a mortgage application.
Pre-approved or pre-qualified? A pre-approved mortgage loan application is where the mortgage lender allows you to shop for available homes based on information you provide in advance of submitting your mortgage loan application. The lender will review your credit and financial data with your financial institution to verify the information you've provided. They will review the information you provide, along with your financial history, to determine if you are a good risk and will give you an approval for a mortgage. You will typically have a period of time during which you will be able to keep your pre-approved status while you search for a home.
Once your application is approved, you will be listed in their system as a pre-approved mortgage candidate. This makes you eligible to receive multiple offers from mortgage lenders based on your credit and other factors. While this makes you eligible to receive multiple offers, there is actually a limit to how many offers you can receive.
On the other hand, a pre-qualified mortgage loan application is where the mortgage lender allows you to apply for a home without going through the approval process. You would simply be allowed to show interest in a property by showing that you have obtained financing for it. You would then be given an acceptance to submit an application to the lender. The lender will review your application to determine whether or not you are a good risk and will give you an approval to submit your application.
There are several differences between these two terms. One is that you don't have to be fully financed in order to obtain either one. Pre-approved mortgages only allow you to borrow the down payment for a specific period of time. Pre-qualified mortgage lenders typically list only those who meet the minimum amount of debt, income and credit criteria as the appropriate candidates. If you're applying to a conventional mortgage company, you will have to meet their credit requirements.
However, there are mortgage lenders that specialize in pre-approved mortgage programs. Typically, you won't have to meet credit requirements in order to obtain one of these loans. If you meet certain criteria, however, they will still let you borrow up to 90% of the value of your new home. This can often be beneficial to people who have experienced a decline in their financial status over the past year or so. While you may lose the ability to qualify for a traditional mortgage, the additional funds from a pre-approved loan may help you keep your residence. Some mortgage companies will allow you to finance up to half of the total cost, which can make it easier to make your monthly payments.
In addition to allowing borrowers to borrow a larger amount of money than they would if they went with a standard mortgage, pre-approved mortgage lenders also offer a number of perks for those who apply. Some lenders will allow you to choose between fixed and adjustable interest rates. You also have the option of choosing between a repayment schedule that suits your needs and one that is tied to a portion of your down payment. You will also find a number of lenders that are willing to approve new or existing borrowers without considering their credit history. This gives you the chance to apply to multiple lenders without worrying about whether or not you will be approved.
If you are shopping for a new mortgage but feel like you may not get pre-approved, don't give up. Lenders do not always indicate when they will give approval. It may take several applications or more before you find a lender who will approve you. Remember, when you apply for a pre-approved rate, it does not mean that you will be given that particular rate immediately. It simply means that the lender believes in you as a borrower and will give you a higher interest rate if necessary.