Pre-qualified vs. Pre-approved: Answering The Questions
There’s a lot of terminology and confusion around the home-buying process. Two key words are “pre-approval” and “pre-qualification”. What’s the difference? And which should you get? Let’s dive deeper into this topic to help you understand the process.
What does pre-qualified mean?
Pre-qualification is the process of determining whether a potential borrower meets certain criteria for loan approval. Lenders typically consider factors such as credit score, debt-to-income ratio, employment history, and assets when making a decision.
Pre-qualification is generally seen as a positive indicator of creditworthiness, and it can give borrowers an edge when competing for a loan.
However, pre-qualification does not guarantee approval. Lenders may still deny a loan after pre-qualifying a borrower if they determine that the borrower is too risky. As such, borrowers should always be prepared to provide additional documentation or information if requested by the lender.
Once you have been pre-qualified, you can apply and go through the full verification process.
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What does pre-approval mean?
Pre-approval is an evaluation by a lender that determines if you qualify for a loan and how much you can borrow. It’s based on the information you provide about your finances, employment, credit history, and debts.
A pre-approval letter from a lender is usually good for 60 to 90 days. During this time, you can shop for a home without having to worry about your financing falling through.
Getting pre-approved is the first step in the mortgage process and it’s important to do before you start looking at homes. A pre-approval also helps you avoid getting caught up in a bidding war or overpaying for a home. And, if you are pre-approved, the lender may be able to close your loan faster once you find a home.
How long does it take to get a loan approved?
Most loans can be approved within a few days to a week. The exact time frame will depend on the lender’s internal process and the applicant’s financial situation. For example, if a borrower has a good credit score and steady income, they may be approved more quickly than someone with poor credit or no income. Ultimately, the best way to ensure a quick approval is to work with a reputable broker and provide all the necessary documentation upfront.
How long does a pre-approval last?
How long a mortgage pre-approval lasts before expiration can vary depending on your lender. In most cases, it lasts from 60 to 90 days. Your financial situation can change significantly within a few months, and many lenders are unwilling to risk their agreement with a potential borrower that has a maturity over the 90-day mark.
Does getting pre-approved hurt your credit?
In short, the answer is no. When you apply for pre-approval, the lender will do a hard inquiry on your credit report. This can temporarily lower your credit score by a few points. However, the impact is usually minimal, and it will go away after a few months.
In the meantime, you can offset the impact by continuing to make all of your payments on time and maintaining a good credit history. Getting pre-approved is a valuable first step in the home buying process, and it shouldn’t have a long-term impact on your credit.
If you apply for a mortgage from multiple lenders within a short time, your score will not go down every time those lenders review your creditworthiness. Since you are only seeking one loan, each loan request from different lenders will count as one complex request. Thus, even if you get pre-approval from three lenders, your credit score will only drop by a few points.
Does pre-qualification affect credit score?
There are two types of loan inquiries that financial institutions make to determine if a person is eligible for a loan. The soft credit request that is used in the prequalification process does not affect your credit score. Reviewing your credit scores and reports is also considered a soft request.
The hard credit request that occurs when you apply for a loan will harm your credit score, although the impact will be temporary.
What’s the primary benefit of being pre-qualified for a mortgage?
Pre-qualifying for a loan indicates that builders and real estate professionals are seriously considering buying a home in a certain price range. The borrower’s pre-qualification is based on the information provided such as financial situation, including debt, income, and assets. The lender reviews everything and gives an estimate of how much the borrower can expect to receive.
Prequalification can be done over the phone or online, and generally, there is no fee. It usually takes one to three days for the prequalification letter to be received. Keep in mind that loan prequalification does not include a review of credit reports or a detailed assessment of the buyer’s ability to purchase a home.
Chances of getting denied after pre-approval
While it is possible to be rejected after pre-approval, it is not common. There are a few reasons why you might be rejected after pre-approval:
- If your financial situation changes between the time of pre-approval and when you apply for the loan.
For example, if you lose your job or have a significant decrease in income, the lender may reconsider your loan application.
- If the property you are purchasing is appraised for less than the purchase price.
In this case, you would need to bring additional cash to make up the difference.
- If the lender discovers new information about your credit history making you a higher-risk borrower.
While being rejected after pre-approval can be disappointing, it is not always indicative of your ability to obtain a loan in the future.
If you are declined, you may want to speak with the lender to find out why and see if there is anything you can do to improve your chances of success next time.
Understanding the difference between pre-qualification and pre-approval can save you time and energy when applying for a mortgage.
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