Mortgage Pre-Qualification: Is it Really That Important?
Mortgage pre-qualification is the basic first step in most people’s house-hunting journey. Before searching for a home, borrowers are encouraged to visit a bank, credit union, or lending agent to “pre-qualify” for a loan. During the pre-qualification meeting, the lending associate will look at the borrower’s basic information, such as credit score, income, and debt load, and make an estimate on how much money the applicant can borrow.
Pre-qualification is not an official offer, but more like a general statement about a buyer’s borrowing potential. It is more convenient and informal, and it can often be done over the phone or online.
Most pre-qualifications are based on information provided to the lender or lending agent. It may not include an in-depth analysis of your credit situation, nor a deep look at your financial picture.
Basically, pre-qualification gives you (and sellers and real estate agents) an idea of how much you may be able to borrow once you are officially approved for a loan.
Pre-Qualification vs Pre-Approval: There is a Difference
While similar, these are two very different components of the mortgage process. As we described above, pre-qualification is a lighter, less-official step in the buying journey. Pre-approval, which usually comes after you find a home, is more in-depth and official.
Pre-approval happens when you find a home you wish to purchase. Once you select a house, make an offer, and have that offer accepted, you will go through the pre-approval phase. During this phase, the lending organization will conduct a thorough analysis of your financial standing and reliability as a borrower.
Pre-approval is basically as statement from the lender saying that if the appraisal, inspections, and other steps go through as planned, the bank will loan a certain amount of money. Borrowers will usually receive a conditional letter that outlines how much they will lend and under what conditions the money will be delivered.
Mortgage Pre-Qualification: Why it’s So Important
Why can’t you just go out and start shopping for homes? The truth is, you can. But if you are serious about purchasing a home and motivated to find a house that fits your needs and budget, having pre-qualification for a certain amount will significantly improve the process.
Helps Buyers Understand Their Budgets
First, and arguably the most important, when you get pre-qualified for a loan, you have a much better understanding for how much you can borrow. For example, you may decide that it’s time to purchase your first home; you’re thinking that with your solid income and manageable debt load, you can likely afford a home in the range of $250,000 to $300,000. So you schedule a meeting with a lending agent and find that you are pre-qualified for a loan as large as $400,000, and the payments are actually at a level you can reasonably afford. Now homes that you would have skipped over are suddenly on your radar.
Of course, it also works the other way. Although it’s rare, you may discover that you do not qualify for as much as you thought; this will keep you from wasting time shopping for homes that are out of your price range. (Again, this is rare; most people will qualify for more than they think, not less.)
Some Real Estate Agents and/or Sellers Work Only with Pre-Qualified Buyers
In practically all cases, real estate agents prefer to work with buyers who have been pre-qualified for a loan. In fact, many will not work with buyers until they have been pre-qualified. This makes perfect sense, as agents do not want to heap hours upon hours of energy and resources into a buyer who may or may not be able to afford homes within a certain price range.
By getting pre-qualified, you are telling real estate agents that your are a committed buyer who will (most likely) be able to afford specific homes. Agents can work with you confidently with the knowledge that you are ready to buy.
The same goes for sellers. Homes are expensive and selling them is complex, so sellers want to know that they are opening their house only to buyers who can actually afford it. Yes, the general public is welcome at a open houses (you don’t need to show pre-qualification letters to get in the door), but if you want a private showing, you’ll be far more likely to be granted entry once you are pre-qualified.
Increases Chances of Bid Being Accepted
Imagine a home seller has two offers from buyers. Both offers are, for example, $500,000 on a home that was listed $510,000. Both offers have the same contingencies, details, timeframe, and requests, but there is one significant difference:
- The first potential buyer was pre-qualified for a loan as high as $600,000.
- The second potential buyer did not go through the pre-qualification process.
Which offer would you accept?
If you think like most sellers, the answer is easy: you would choose the pre-qualified borrower. The risk of the first offer not being approved for the loan is far less, statistically speaking, than the second. Yes, financing for the first offer could be rejected while the second will, most likely, be approved, but if you are going to accept an offer and take your home off the market, you want as high an assurance as possible that the financing will go through.
For this reason, sellers are more likely to accept an offer from a pre-approved buyer.
Get Pre-Qualified for Your Next Mortgage!
If you are serious about looking for a home in San Diego and the surrounding area, contact our staff today. We would love to help you find the right loan for your needs, and we’ll take a common-sense approach to the underwriting process, increasing your chances for final approval!