buc_177.jpgI have been asked by some clients this week whether they should be pre-approved or pre-qualified for a loan.  Furthermore, they are confused about the difference between the two.  So, I have got to believe that if the few people in my sphere are questioning the meaning of these terms, it must be a nation-wide phenomenon, and there are a lot of folks out there that wonder the same. 

As a first step, it is always a good idea to be ‘pre-qualified’ with an experienced lender before you embark upon the tedious mission of house hunting.  It is frustrating to start working with a client that has no idea what they qualify for and then they start looking at those $1M homes, just to find out later that they can only afford a $500K house.  It is a waste to look at real estate without knowing the amount that can brought to the table. 

Pre-qualification is when the lender takes your basic asset, income and debt information and determines how much of a loan you may qualify for.  This is a simple calculation and the amount you qualify for is essentially based on your DTI (or Debt to income ratio).  At this stage of the game, your full credit may (or may not) be pulled.  Even if your full credit is pulled, there is no commitment from the lender that you are ‘pre-approved’ for a loan.

To be taken seriously you need to be ‘pre-approved’.  The borrower receives a pre-approval when the loan officer takes a full mortgage application, pulls credit and determines exact loan amounts and requirements.  At this point, the calculations that got you pre-qualified have been done, but more importantly the loan officer obtains a tentative approval for the loan subject to the borrower fulfilling certain conditions.  Conditions could involve verification of employment, income, assets … etc.  A pre-approval is really the utmost form of approval you can receive short of a full approval.  A major benefit to being pre-approved is that the seller will take you seriously.  Most sellers won’t even consider a buyer without a pre-approval letter. 

It is always smart to get pre-qualified when you begin your search for homes, but it is even better to get pre-approved.  It is the best tool and power that you have as a buyer to determine how much house you can afford.  Moreover, it will let your Realtor know how to help serve you better.