The terms “pre-approval” and “pre-qualification” for a mortgage are different, although some lenders use the terms interchangeably. Both can help you get started with your home buying, but are useful at different points in the process.   Pre-qualification is solely based on information about income, assets, liabilities and credit.  It does not involve providing your social security number, date of birth or a hard credit inquiry credit, which means it won’t ding your credit score.

This is a good way to get started for most prospective home buyers that come through one our education classes.  It is ideal in the early stages of the homebuying process for learning about your purchasing power and loan programs.  This is an excellent first step, but you cannot buy a home with a pre-qualification.  If you want a number to base your planning and savings on, even if it was just a close figure this is the place to start. Getting pre-qualified for a mortgage will help you find out the loan amount I could be approved for, what your potential home-buying budget will be, and how much you may still need to save for a down payment, without dinging your credit report.

For a pre-approval, lenders verify your information and make a hard inquiry into your credit. A pre-approval is what you need to be able to make an offer on a home and identify a true maximum on how much you can borrow.  In a nutshell, a lender will collect your income and asset documents to validate the numbers provided in your loan application to make sure you can purchase a home.  A typical list of documents collected are:

• 30 days of paystubs
• Most recent 2 years of W-2’s
• Two years of personal and business returns if you are self-employed
• Last two months of bank statements and investment/retirement accounts

Getting the pre-approval is your greenlight for buying a home!  Now, there are two versions of a pre-approval.  Most borrowers don’t know that lenders take a loan application, pull a credit report and a computer (Automated Underwriting System) reviews and approves or declines your application.  But can you purchase a home with an automated approval?  The answer is yes and no.  This is considered a credit approval and can be given to you to make an offer on a home.  In most cases, lenders are going to take the next step and gather your income and asset documentation to submit to a human underwriter for approval.

This approval level is more solid since the human underwriter is going to validate all the numbers and program guidelines to make sure your loan application is complete.  Once the underwriter verifies the numbers they will approve your loan.  This is a much stronger approval and one that the listing agents are looking for versus the credit approval.  An underwritten approval also can speed up the closing process once you find a home.

Bottom line:  A pre-qualification will give you what you need to know to get started and a pre-approval is what you need to buy a home.  Once you have these terms down you can get the process started.  Don’t forget the education before you start any of this because that gives you the knowledge and confidence to make good decisions.  Register now for a home buyer education class!

If you are ready to get pre-qualified or pre-approved, contact Curt Tiedeman (License NMLS 35554) at Caliber Home Loans.  His contact information is 206.6504202, curt.tiedeman@caliberhomeloans.com or www.CurtTiedeman.com