If you've ever applied for a mortgage, you most likely noticed that there are a variety of specific terms associated with the home buying process. Many of these terms related to the real estate industry are fairly similar, which can easily confuse inexperienced home buyers. For instance, a couple of these particularly confusing terms are pre-approval and pre-qualification. The majority of first-time home buyers think that these two real estate terms have the same meaning, but that's actually not true at all. While both of these terms deal with the amount of lending you may receive from a bank or mortgage company, they are quite a bit different from one another. Take a look at some of the differences between pre-approval and pre-qualification in terms of mortgage loans and real estate transactions.
Pre-Approval – A pre-approval is usually the most dependable and accurate estimate of how much you can afford to spend on a home. This is because a pre-approval is mainly determined according to the information you provide the lender and the results of your credit report. Once the lender looks into your credit history, they're then able to decide what would be the appropriate amount to lend based on data such as your overall credit score and your debt-to-income ratio. Being pre-approved for a certain amount is recommended because then you won't be looking at properties that may be out of your price range, which is the best way to avoid disappointment down the road.
Pre-Qualification – On the other hand, a pre-qualification is a bit more basic than a pre-approval because it is not at all based on your credit history. This means that the lender has no other choice than to rely solely on the information you provide them. If the credit score and amount of debt you provide them with is not accurate, you will most likely get pre-qualified for more than you can actually afford. While some people prefer to go with a pre-qualification when they begin house hunting because it doesn't require them to submit their social security number, it could cause some serious problems. For example, if you get pre-qualified for a loan amount and then find a home that you believe will fit your budget only to find out that you can't afford it based on your credit and debt load. You'll probably be terribly disappointed and will have to start the house hunting process all over again.
Once you begin taking the steps to purchase a new home, you'll soon discover just how stressful it can actually be. Having an idea of the differences between a pre-qualification and a pre-approval can better prepare you to take on the task of find your perfect home. Most home buyers are really best off getting pre-approved instead of pre-qualified so they can be confident when shopping for a home in order to save time and avoid disappointment. As a matter of fact, some mortgage lenders only use pre-approvals and don't even provide pre-qualifications. Keep this bit of information in mind as you begin your search for a place you can officially call your own.
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