Pre-Qualification and Pre-Approval Both Necessary at Start of Home Search

When looking for a home in Fairfax County, you’d better have your ducks in a row. It may be a buyer’s market in most places in America right now, but the housing crunch has, for the most part, passed this area by.

Part of getting prepared is getting pre-qualified and pre-approved for a loan – and knowing the difference between the two.

Most Realtors want you to be pre-approved before they start showing you houses. A pre-approval letter from a mortgage lender tells the seller that you’re a player. If you make an offer, it’s serious and chances are good it’s going to go through.

Big difference

So what’s the difference between being “pre-qualified” and “pre-approved?” Think of it as big picture versus a detailed, close-up view.

A pre-qualification for a mortgage is simply a first step in getting pre-approved. In this market, it’s not going to be of much use by itself.

To get pre-qualified you provide some information — a general picture of your financial situation, including income, debts and the value of your assets. This gives your agent a picture of the house you can afford. She knows what to show you and can help you better target your search for a home.

It gives the mortgage lender an idea of the size mortgage you can afford. But it’s only a step on the way to getting an approved loan because none of the information the lender is looking at has been verified. It’s simply your estimate.

Pre-approval process

Once you’ve been pre-qualified you start on the pre-approval process. This is where you start providing documentation and jumping through some hoops.

It starts with the lender pulling a credit report. It will be looking at your credit score and your debt to income ratio.

You start by filling out a mortgage application and then giving the lender all the documentation and information they need to run a check of your financial background. The lender will also check with your employer to verify your income and employment status.

At the end of the process you end up with a letter from the lender saying you have been pre-approved for a specific mortgage amount. It may be more, but probably less, than the amount you were pre-qualified for. But with that specific information you know exactly how much house you can afford and can better target your search.

Keep in mind that once you’ve found a house and signed a sales contract, the process starts all over again. Just because you have been “pre-approved,” it doesn’t mean you’re going to get the loan.

Even more questions

At this point the loan underwriter gets into the act. The underwriter will measure the risk of making the loan to you. In other words, the underwriter will try to figure the odds you will default.

Since the onset of the housing crisis mortgage underwriters have a heightened concern about risks, even in a stable market like Fairfax County. So don’t be alarmed if, after filling out the application, the underwriter asks additional questions and requests additional documentation. It’s all part of the process in the new environment but in the end, if all goes well, you’ll get a loan commitment letter. You can pretty much take that to the bank.

Both pre-qualification and pre-approval are worthwhile steps to take at the beginning of your home search. Again, some buyers agents may insist that you go through these steps before they begin showing you houses.

But it’s also good information for the potential buyer to have. Knowing exactly what you can afford can help you decide where to look and how much space in a home you can realistically afford.