Pre-Approval Vs. Pre-Qualification? How to Know which one You Have & Need.
Many buyers think the first step of looking for a home is finding one but this actually the wrong approach. The first step is actually a securing financing through a “Pre-Approval” process.. When an escrow falls-out it is too often because the buyer couldn’t secure financing. In this very competitive market many home buyers may not even be able to visit a house or a condo at all without a pre-approval letter as many listing agents are asking for it in order prior to confirming a showing appointment. Then, once you have found a property, sellers will not take a client’s offer seriously unless they have pre-approval to go along with it, period. By the way, even if you make a lot of money and especially if you are self-employed this applies to you even more.
Pre-Qualified vs. Pre-Approved? What’s the Difference?
So what is a Pre-Approval versus a Pre-Qualification? Well, the quick phone call you may have had with your bank or that simple online form you filled out? That was a pre-qualification. This just says that you may very well qualify for a loan subject to verification of just about everything related to your income. Many banks or lenders will give you this pre-qualification just to "get your business and to get your foot in the door, their door" making the process look simple right from the get-go. But once you are in escrow, the real work begins figuring out if you really do qualify for a loan, which you may not. With a pre-approval, you will go through a much more detailed approval process from the get-go giving you a realistic outlook of your financing. During the Pre-Approval process your broker/lender will ask to review things such as :
Pay stubs and W-2s if you're salaried or 1099s if you're self-employed (typically two years).
Tax returns (typically going two years neck)
Bank, retirement and investment account statements (two to 12 months, depending on loan)
Financial statements (if self-employed)
Letters of explanation for credit blemishes
Divorce decrees, if you pay or receive spousal or child support
At the end of the submission process they may also question certain expenditures, deposits and withdrawals and request specific explanations. Once the entire process is done you can be a lot closer to being fully approved and you are good to make an offer. You will also know your loan’s APR (Annual Percentage rate) and monthly payments HOA, property taxes and other fees associated with your loan.
In the end, a pre-approval is like the golden ticket to buying a property! Without it, you won’t even be able to enter Charlie's Chocolate factory…
Need a mortgage broker referral? For more information, please don’t hesitate to reach out to us! Michel@BronRealtyGroup.com or (310)467-8042