By Tali Wee
Many homebuyers think there’s no difference between mortgage pre-qualification and mortgage pre-approval. But the difference can mean getting a home or missing the opportunity.
A pre-qualification doesn’t mean you’ve secured financing. It means you’ve had a short conversation with a loan officer about your estimated purchase price, down payment, income, debts, and credit score. Then they give you a feel for what your rates and monthly obligations might be. A pre-qualification is so simple you can actually pre-qualify yourself using two different mortgage calculators: first use an affordability calculator to determine a purchase price appropriate for your income and down payment, then use a payment calculator to determine your exact monthly obligations. A pre-qualification is a useful starting point, but far from a pre-approval.
A pre-approval is when you get your loan approved in advance of buying a home. You can send documents to your lender, deliver documents in person, or fill out online forms for pre-approval. But, not all pre-approvals are equal, so you must ask your lender which type of pre-approval they’re completing:
(1) Is your loan officer collecting and analyzing all of your documentation, then telling you to start shopping for homes in a certain price range?
(2) Is your loan officer collecting all of your documentation and sending it to their underwriter who analyzes it and issues a formal bank loan approval in advance of you buying a home?
The second type means you’re actually pre-approved. The first type just means that your loan officer has reviewed your documentation, but it’s the underwriter – not the loan officer – who makes the loan approval. To get to the stage of underwriting pre-approval, a good loan officer will ask you to provide these items:
- Personal information including birth date, marital status, number of children and ages. Loan applications are federal documents and require this data.
- Residence history for at least two years. If you’re a renter, a record of your rent payment is needed. If you own, all mortgage, insurance and tax figures are required.
- Employment and income for at least two years. If you receive commission or bonuses, you need two years of figures – all lenders average variable and self-employed income over two years. Full tax returns for two years are always required, including business taxes if you’re a business owner.
- Asset balances including all checking, savings, investment and retirement accounts. If you move money among accounts, you must provide all accounts even if you’re only using one account for the down payment, because the lender will review every line item on two months of full account statements and ask for the paper trail for large deposits and withdrawals. If you plan to use gift funds toward your down payment, lenders must see documentation of such transactions, too.
- Debt payments and balances for credit cards, mortgages, student loans, car loans, alimony, child support or anything else. All of these payments factor into your debt-to-income ratio that’s evaluated by your lender.
- Social security number is needed to run a credit report to confirm all your debts and credit scores. Be sure to check your credit report annually to ensure they’re accurate.
These items are the minimum needed for a proper pre-approval. So, be prepared to provide the necessary documents for a timely pre-approval process.
After you get into contract to buy a specific home, you’ll need to provide additional property information because loans are based on borrower and property profiles. Your loan officer’s underwriter will need to review the home’s title report, appraisal, and any other relevant documents such as legal documents for condos, to finalize the loan.
If your loan officer follows the second type of pre-approval process, your mortgage process should be smooth once you get into contract. If they don’t, expect a lengthier approval process when you finally find the home for you.
Tali Wee is a Marketing Content Specialist at Zillow.com. She writes about personal finances, mortgages, and home improvements for the Zillow Blog and other Zillow partners.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.