EchoBay Expert: Which loan is better to have before shopping for a house; a pre-approved home loan or pre-qualified home loan?
Loyal Reader: A pre-approved home loan is better than a pre-qualified home loan. With a pre-qualified home loan, you basically have only had a conversation with your lender about your current situation. You give them information about your income, assets, employment and credit history. From this, they will decide how much you pre-qualify for.
But because the lender is just taking your word for it on all of this information, a pre-qualification is not any kind of binding agreement. When you are pre-qualified for a loan, you will still need to make your sales contract contingent on financing as it is not a done deal. When you are pre-approved for a loan, the lender goes a step further and verifies all of this information.
They will likely call your employer, check your bank records, ask for copies of your last two tax returns and pull your credit. At this point, the lender will usually charge a small fee for the application and your credit report. Once this information is in hand, the lender will pre-approve you for a certain amount within a certain timeframe.
With a pre-approval, you can have a sales contract that is not dependent on financing and you may be viewed more favorably by the seller. Be aware though if there are significant changes to your situation or if you exceed the approved timeframe, your pre-approval may be null and void.
If you are just beginning to look for a home, a pre-qualified home loan is a great way to have an idea of what you will qualify for. When you get serious about the home buying process, find a lender and get pre-approved. It will make the process much easier for you.