Should You Get Pre-Qualified Before Starting a Home Search?

Buying a new home can be a fun, exciting, and stressful time, even if youve done it before. When youre ready to make a move, its easy to pull up your internet browser and start searching. Not so fast, my friend. Theres one thing you must do first to avoid a lot of frustration, time wasted, and disappointment.

Unless youre paying cash for your new home, chances are youll be taking out a mortgage. Youve probably heard a lot about getting pre-qualified. Ill be completely honest with you. When youre looking for a home, pre-qualification isnt enough.

What is Pre-Qualification?

When you get pre-qualified for a mortgage, the lender is saying that youre probably going to qualify for a mortgage. You havent completed a full application, and they havent run your credit report or reviewed your income and assets. Its fast, and it may seem like enough to go house hunting.

In a competitive market, the difference between your offer being accepted or rejected can come down to who can close first.

Unfortunately, pre-qualification isnt enough. Often when you find a home you want, especially in a competitive market where there are very few homes available, the buyer who can close first wins. When youre pre-qualified, you still need to go through the complete loan application and underwriting process, which can take time you dont have when homes are selling in a matter of days.

If youre pre-qualified, you could find a home that you think is within your budget by using an online mortgage calculator, but then find out that you cant get approved for a loan that size, or the payments turn out to be more. Calculators can give you a general idea, but they are often not accurate for your particular income, credit, and loan amount. The interest rates are estimates, and you could have a calculator that says youll get one interest rate, while the one you end up with is higher.

What is Pre-Approval?

Pre-approval is the second best way to be financially prepared for home buying (buying with cash is the gold standard). Unlike pre-qualification, pre-approval is given when youve gone through the loan application, credit check, and underwriting process. All thats left when youve been pre-approved is to find the property. When youve found the home you want to buy, the lender will then review the home and let you know if theyll lend on it as well as ascertaining the value.

When you shop for a home with a pre-approval letter, youll know exactly how much of a loan youre eligible for and what the actual payments will be. Of course, you could always find a home under the amount you qualify for. What if youre in love with a home thats outside the loan amount youre eligible for? Your lender may allow you to take out the mortgage, but youll have to bring the difference between the sales price and the loan amount to the closing table.

What happens if the home you want is in high demand? If you end up in a bidding war with multiple offers, the sales price may be higher than the appraised value of the home. If thats the case, as in a home beyond the mortgage you can get, your lender may allow you to pay the extra out of pocket. They will have to adjust their evaluation of your approval based on the reduction in your assets, which may affect the terms of the loan.

How Much Does it Cost to Get Pre-Approved?

Many buyers choose to get pre-qualified instead of pre-approved because its faster and it usually doesnt have any costs associated with it.

Pre-approval, however, may have upfront costs such as application and credit report fees that you may be reluctant to pay for when youre looking at writing a check at closing for tens of thousands of dollars at the closing table before you get the keys. In the long run, the time and money you spend on a pre-approval will save you more time and money, as well as a lot of hassle and frustration.

What Happens During the Pre-Approval Process?

Once youve chosen a lender, your loan officer will sit down with you either in person or on video or over the phone and take all your information. If youre going with an online lender, youll complete the application online, and provide documents online. Before submitting an application, check out a few companies, and consider what fits your needs. Would you rather have an expert walk you through the process with personal attention? Or would you rather do it all online? Often the fees are lower with an online lender. The tradeoff is the personal attention and having someone who gets to know you. If you know you have great credit and little to no debt, an online lender may be a good fit. Chances are, you wont need to submit a lot of extra information. If you have some credit challenges, a local or traditional route may be a better fit.

When choosing a lender, cheaper is not always better.

After the application is taken, a loan processor will gather all the information needed to verify the information on the loan application. That can include running your credit report, paystubs, bank statements, tax return copies from the IRS, employment verification, and extras like letters explaining credit report challenges.

Then your loan file is sent to an underwriter, who will analyze your documentation and financial situation against loan approval guidelines, and determine if youre approved and if so, what loan amount theyre willing to approve you for.

Youll be provided a pre-approval letter, which your Realtor will attach to any offer she presents on your behalf to a seller.

Should You Get Pre-Qualified or Pre-Approved?

Get pre-approved or you risk missing out on the home of your dreams.

If at all possible, get pre-approved. Youre much more likely to get the home you want. Youre more likely to have an offer accepted, and youll avoid frustration and delays in closing that can happen if youre only pre-qualified. If you submit an offer and are only pre-qualified, the contract will be subject to your loan approval, which can cause delays of weeks or months depending on your situation. Most sellers dont want to wait that long, and if they have another offer from someone for the same price who is a cash buyer or pre-approved, theyre likely to take that offer, and youre back to square one.

If you have more questions or would like a list of lenders that I trust, call or text 832-402-6040 or contact me below.