Mortgages: Pre-Approval vs. Pre-Qualification

Mortgages: Pre-Approval vs. Pre-Qualification

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Purchasing a home is a big deal. When the time comes, whether it’s your first home or you are moving into a new one, you’re most likely in need of a mortgage. With all of the information available, it can be overwhelming knowing where you’re supposed to start. 

 

Pre-approval and pre-qualification are two terms that seem to be used interchangeably, depending on your lender. However, the differences are subtle, and figuring out which one you’re supposed to pursue can be challenging. 

 

Let’s look at the differences between pre-qualified and pre-approval so you can determine the one that’s right for you.

 

You’re Pre-Qualified!

Getting a letter in the mail that you’re “pre-qualified” for a loan or credit card essentially means that the creditor has done a fundamental review of your creditworthiness and you seem like a good candidate for a loan. 

 

Typically, a consumer has initiated the process by completing and submitting a prequalification application. Requirements for prequalification vary by lender and involve sharing basic financial information like your annual income, monthly housing payments, and any savings you may have. 

 

In some cases:

A lender may check your credit by initiating a “soft inquiry” into a credit bureau to get a glimpse of your credit background. 

 

Be aware that a “soft inquiry” has no impact on your credit score. But it can give the lender enough information to decide whether or not you would meet the minimum requirements for lending. 

 

difference between preapproved and prequalifiedAt this stage, the lender may come back and tell you that you are “pre-qualified.” You can choose whether or not you want to make an official application and continue with the review process. 

 

This usually requires you to submit official documentation and agree to a hard inquiry on your credit report, which can impact your credit score. It’s important to note that while you may pass the prequalified bar, it doesn’t guarantee that you will be approved. 

 

The benefit of prequalification is that if you get denied at this stage, you can move on to another lender or creditor without having a hard inquiry impact your credit score.

 

With pre-qualification, you’re only receiving a ballpark estimate of how much you can borrow. Your lender is only taking into consideration the data that you provide without requiring validation. There is no commitment to the lender’s part to guaranteeing you will be pre-approved or approved. It’s merely a high-level evaluation of whether or not you’re eligible for a mortgage loan, and a rough estimate of how much it could be.

 

You’re Pre-Approved! 

A pre-approval confirmation is the next step after pre-qualification, and you’ve submitted the proper documentation to complete a hard inquiry

 

Pre-approval requires you to complete an official mortgage application, including all the necessary documentation for an extensive evaluation of your financial history and situation. A pre-approval application sometimes requires an application fee, depending on the lender, and can cost several hundred dollars. 

 

Once the lender completes your preapproval application, they will typically specify a maximum amount of credit they are willing to give you. They will also give you an idea of the interest rate you can expect to pay.

 

Once you are preapproved, you will receive a conditional commitment from the lender in writing for the exact home loan amount you are qualified for. With this document, you’ll know exactly how much you can afford for a home, and you can look for places that are at or below your approved price level. 

With a preapproval in hand, you’re not only one step closer to getting an actual mortgage, but sellers will know that you’ve secured a home loan amount, and you’re serious about buying. 

approved for home

What’s Really the Difference?

While preapproval and prequalification are similar, there are slight differences. 

 

With pre-qualification, it’s considered the first step in a mortgage process, while pre-approval is the second step. A prequalification is simply a high-level overview of your financial history and typically doesn’t require documentation to verify. 

 

Moving into pre-approval does require hard evidence and documentation of your financial situation, including all your income, assets, and debts, and a deep dive into your credit history resulting in a hard inquiry on your credit report.

 

Which Is Right For You?

To figure out whether you need to be pre-qualified for a mortgage or gain pre-approval, you need to look at the lender’s definition of each. 

 

Because: These words are interchangeable in different companies, it can be hard to know which one you should be focusing on. 

 

Ask your lender how they define pre-approval and pre-qualification, and which requires a credit check as a hard inquiry. You’ll also want to check-in with your real estate agent, as they have an inside view into which is required and provides more credibility for the market in which you’re looking to buy.

 

Since the definitions of pre-approval and pre-qualification can vary, you need to ask your lender about their process and the interpretations they use. While neither pre-approval nor pre-qualification guarantees a loan offer, both can give you an idea of how much you may be able to borrow to purchase your home. 

 

The home buying process can be confusing, especially when you’re dealing with terms that are often used interchangeably. That’s why your best course of action is to talk with your real estate agent and prospective lenders about their process and what’s need to meet the minimum requirements for home buying. 

 

Good luck, and happy house hunting!

First Time Home Buyer? Where Do I Start?

First Time Home Buyer? Where Do I Start?

Reading Time: 4 minutes

Considering buying a home?  Wondering how to get started in the home buying process?  Or when to start the process? Your stomach gets all tight just thinking about purchasing what could be your biggest financial investment to date.  Understanding the process and having a plan may remove some of those butterflies. The biggest key to a successful stress reduced transaction is to start early and reduce the chances of last-minute surprises, especially when you’re buying your first home.

 

Up to 1 Year Out from Purchase

  1. Check your credit report. If you have items on your report the earlier, you tackle the issue(s) the more time there is to raise your credit scores.  You can check your credit for FREE through AnnualCreditReport.com, the only free online credit report authorized by Federal law.
  2. Check your FICO credit score. The FICO score indicates your creditworthiness and determines your interest rates and terms of the loan.  The higher the FICO credit score the more options are open to you as a buyer.
  3. Reduce your outstanding debt. Get your outstanding debt (Credit Cards & Store Cards) below 30% of the approved limit on the credit account and if possible, get it down below 10% of the limit.  Be sure you are paying on time and early if you must use the card, to keep it below these levels before the reporting date.  If you have a large number of cards and balances you might want to meet with a credit counselor, like Joe Camacho with Phenix Group to get a plan together.
  4. Saving! The higher the down payment you have the more options you have with mortgage companies.  So, start saving what you will need now.  You will need to prove you have had your down payment balances in your account’s months in advance of closing as proof of funds.

The above-mentioned items may mean a change in your spending patterns.  You are going to want to look at cutting back on frivolous expenditures, expensive vacations and forgo luxury purchases at least until after closing.  It is so sad to see someone do all this hard work, get approved for their dream home then go out and make a last-minute purchase of furniture or a vehicle.  Then no longer be able to qualify for their home loan.  It, unfortunately, happens more than you would think.

 

Around 6 Month Point Prior to Purchase

  1. Start researching your mortgage options. There are many different types of mortgages and first-time buyer programs.  We will expand upon these programs in future articles.  Do the research and find out the risks that can incur different types of mortgages?  At this point, you may want to sit down with a FREE consultation with Real Estate + Credit Professionals.
  2. Look into Typical Unforeseen Home Ownership Costs. These can include, but not limited to, Homeowners Associations (HOA) fees, Home Warranty Products, Special Assessment Zones, and Utilities Rates to name a few.
  3. Recheck your credit status and scores. Have you made the progress you need to qualify for a mortgage?  If not, you will need to kick your credit repair into overdrive.  At this point, you need to consider hiring a credit counselor, like Joe Camacho with Phenix Group to assist you in getting to the scores you desire.

 

3 Month Point – Critical Credit Period

  1. You will need to reduce credit usage. FICO score is affected by how much of your available credit lines you have outstanding.  Learn when your credit provider reports balance outstanding on your card to the bureau.  This typically does not correspond with your debt’s payment date.  Try to pay down any balances before the reporting date.  Keep your balances below 30% and as close or below 10% if possible.
  2. It is very important at this point to not open or close any accounts. You are now close to starting the home buying process and these steps can have a serious impact on your credit scores.  This is critical to remember even after you have a letter from your mortgage lender qualifying you for a home mortgage and up and to and including closing the transaction.
  3. Begin researching neighborhoods and real estate agents. What is considered a great neighborhood is going to be the items important to you like; distance to work, good schools, shopping, parks, activities, and great amenities.  We are adding this suggested task at the 3-month period, but nothing wrong about starting this process much earlier.

 

The “Home” Stretch – 2 Months Out

  1. You need to be very cautious during this period in having your credit pulled for any type of financial transaction. You should have considered the different mortgage options out there already and only have a limited amount of mortgage companies pull your credit report.  However, if you are shopping mortgage companies do them in a short period of time and they will be counted as one pull
  2. Check mortgage rates and programs like 1st-time buyer assistant programs. Know your FICO score to get mortgage rates, they don’t have to pull your credit to discuss rates with you
  3. Once you have selected your mortgage company you want to get pre-qualified for a mortgage. This way you know how much you can afford. Plus, you will need this letter for your agent to submit offers for you.  The seller wants to know you can afford to purchase the home for the purpose of reviewing and accepting the contract.

 

You should now be prepared with a better credit score, larger down payment and information on mortgages to go out and find your dream home to make a confident offer on!  Good luck out there.

How To Get Assistance With Down Payments

How To Get Assistance With Down Payments

Reading Time: 3 minutes

Credit repair companies say, if you’re thinking of buying a home, the general rule of thumb is that you must have at least a 20 percent down payment before you even think about getting a loan. However, with home prices being what they are today, many people can’t afford even that.

According to a recent survey of 10,000 American adults, two out of three people said that getting the money for a down payment was the biggest hurdle they faced when buying a home.

The good news is that this doesn’t mean you’re out of luck. There are many down payment assistance programs that can help you so you can get the home of your dreams.

In this article, we look at how down payment programs work, how to get assistance, and who is eligible for help.

How These Down Payment Assistance Programs Work

In most cases, a down payment assistance program is funded by the government, whether it be state, local or federal. However, sometimes these programs are available from non-profit or charitable organizations as well. If you’re thinking about getting help from the government for your down payment, you’ll have to apply and see if you’re eligible.

The first things agencies look at when considering people for down payment assistance are the potential borrower’s income and financial obligations. For example, the Texas State Affordable Housing Corporation (TSAHC) is one agency that offers down payment assistance, and they state that their income requirements vary according to your profession, the size of your family and the county you live in. Also, they will take your credit score into consideration as well. Keep in mind that every state has different rules regarding who’s eligible, but in most cases, agencies look at similar factors regarding each person’s eligibility.

Another thing to keep in mind is that each program treats the money you get different. In some cases, the money you receive could be from a grant, an interest-free loan, or another type of loan that you have to pay off. Also, in many cases, you have to agree to live in the house for a period of time if the money you received came via a grant that varies from agency to agency. And, if you received a loan and you decide to move, you’ll have to pay off that loan prior to selling and moving.

Types of Programs

As mentioned, these down payment assistance programs come from a variety of sources, including:

  • Grants — The assistance you get through a grant doesn’t have to be paid back.
  • Second Mortgage Programs — This type of assistance is usually available as a 0% interest the second loan with repayment terms that can range from 5 to 30 years.
  • Deferred Programs — With this program, the repayment is delayed until the buyer meets particular criteria, which could be when the buyer sells or moves out of the home.
  • Forgivable Second Mortgages — With this program, you may be forgiven some or all the money you received for your down payment.

The good news for home buyers is that there are over 2,000 down payment assistance programs available throughout the country, so whichever state you’re in, help is available for you.

Who Is Eligible?

In most cases, down payment assistance programs are only available to first-time home-buyers. For example, My First Texas Home program is open to home buyers from virtually all professions, first-time buyers and veterans. In contrast, the TSAHC says they offer assistance to prior homeowners as well as a first-time buyer. Also, the 5 Star Texas Advantage Program doesn’t have a restriction on first-time homebuyers, but those taking advantage of this program will have to complete an online course to be considered.

Also, while many of these programs are only available to first-time buyers, it’s important to keep in mind that first-time homebuyer is generally defined as someone who hasn’t owned a home in three years. So if you owned a house once, but are now renting a home or apartment, you may still qualify as a first-time buyer.

The good news is that, regardless of your situation, there’s usually a program available to you.

What About Credit?

Typically, these down payment assistance programs are geared toward people who wouldn’t otherwise be able to afford a down payment, which includes people with bad credit. However, if you do have bad credit, it’s still a good idea to start rebuilding your credit as much as you can before you apply for one of these programs. You can do that by making sure your bills are paid on time and to pay down your debts quickly.

Owning a home is part of the American dream, and down payment assistance programs are helping that dream become a reality for thousands of people every year.