Why does everyone tell you to get a mortgage pre-qual (pre-qualification) or pre-approval before you start seriously looking for a house. And what’s the difference between the two? Which one is better for you? Let’s look at the answers to these questions.

What are Pre-Quals and Pre-Approvals?

A pre-qual and a pre-approval are both letters from a lending institution that says the institution has reviewed your financial information, and is willing to make a mortgage loan to you. Each type of letter will specify the maximum amount of the loan, the minimum down payment that you will need to put down, the interest rate, and the expiration date of the letter. Both address one component of the lenders pre-mortgage review: you, the borrower…determining that you are creditworthy. Note that there is another component of pre-mortgage review: the property you ultimately want to buy. Both types of letter are subject to the property you eventually pick also satisfying the lender’s review.

Why Get a Pre-Qual or Pre-Approval?

The first and obvious reason to get one of these letters is so you will know the amount and type of mortgage loan the banks will give you. No sense looking at properties – and worse, falling in love with one – only to find out that you can’t get a big enough mortgage to buy the property. Not only does knowing your price range prevent you from wasting time, it also prevents your agent from wasting time. That’s the reason the best agents frequently ask that you get one of these letters before they show you property.

What is a Pre-Qual?

A pre-qual letter is issued by a lender based on two things: (1) a review of your credit report, and (2) a review of your income, debt, and assets based on information you provide to the lender without documentation. The letter will say that, based on your credit history, and IF the information you provided can be documented and reviewed to the lender’s satisfaction, then you will be eligible for the loan referenced in the pre-qual letter.

Lenders have very specific guidelines for what qualifies as income, debt, and assets.  Until they review your documentation in detail, they can’t tell if the numbers you shared with them will meet all their detailed requirements. For example, you may indicate that you have $X in assets. If the lender determines that a portion of those assets is comprised of a recent gift from family members, the lender will not count that portion of your funds for mortgage purposes.  It does not meet the guidelines.  (See: “How Does the Bank Evaluate the Borrower?”)

What is a Pre-Approval?

Like a pre-qual, a pre-approval involves the lender’s review of your credit report. In addition, they do a thorough review of records that they require you to provide to document your income, debt and assets. To get a pre-approval letter, you effectively go through the full mortgage application process, just without including a specific property. Unlike a pre-qual, the pre-approval letter does not say “IF the information you provided can be documented, etc.”. That process has already been completed and you are good to go once you select a property that passes muster.

Relative Costs and Timing

A pre-qual letter is typically free of charge. You can get one in as little as an hour – and typically not more than a day or two.  Your obligation to ultimately apply for a mortgage with that particular lender is very thin.

A pre-approval letter usually takes 2 – 3 weeks if you provide your documentation to the lender in a timely fashion. It tends to cost in the hundreds of dollars, and the fee is typically applied towards your mortgage fees if/when you apply to the same lender for a mortgage loan. That, of course, is an incentive to stick with the lender. Even if you manage to get a free pre-approval, the lender will probably have worked very hard on it, and you may feel somewhat obligated to work stay with that lender for the mortgage.

Another Good Reason

Suppose you don’t have a pre-qual or pre-approval letter, and you find a property you want to buy. You will be hard pressed to get the sellers to accept an offer from you. Sellers don’t want to tie up their property with buyers who can’t provide proof of their ability to get a mortgage and complete the purchase of the property.  At this point, you will have to scramble to provide the seller with a letter from a lender. As mentioned above, a pre-qual – which is limited in scope – can be obtained quickly.  But, you will have to hope the seller will feel comfortable with the limits of the assurance provided by a pre-qual. On the other hand, since a pre-approval takes weeks to get, you may lose the property to another buyer by the time you get the letter. Had you just listened to everyone who told you to get a letter before seriously looking for a property, you would have a strong pre-approval in hand, without waiting even one extra hour.

Pre-Qual vs. Pre-Approval:  Which is Better for Me?

We already know that a pre-qual is less definitive – you will be eligible for less of a loan if the lender’s full mortgage review of your specifics changes your financials. So when would you use one? If you are still researching lenders and want to know quickly what you can spend without cost or obligation.  Or, as in our example above, if you found a property that you want to buy before getting any letter, and hope the seller might accept a quick pre-qual.

On the other hand, you would go for a pre-approval if you are not under time pressure.  And ideally, you would get one from a lender with whom you feel comfortable working for the duration. It is particularly advantageous to have a pre-approval in hand if you are looking to buy in a competitive market like the Greater Boston Area. The pre-approval assures the owners that if they take their property off the market to sell it to you, it is virtually a sure thing that you will get a mortgage. The bank won’t need more details about you and your finances. Of course, getting the property approved isn’t a sure thing, but if there is a problem with the property, that is the seller’s problem. It will be an issue for every buyer…so it won’t affect your competitive position.

 

If you have any questions about pre-quals or pre-approvals, or if you want recommendations for the best lenders in the Greater Boston Area, contact Chris at 857-829-0282 or chris@isellmass.com.

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