If you’re hunting for a house, you’ve likely had realtors encouraging you to become pre-qualified or seen blog articles highlighting pre-approval as a vital step in purchasing a home. It probably won’t surprise you to learn that your realtor and those articles are right – pre-qualification and pre-approval are nearly essential in today’s real estate market.

But why is it important to become pre-qualified or pre-approved? And what’s the difference between the two terms, anyway? In this article, Troy Fairbanks, Mortgage Sales Manager (NMLS: 525344) with First Merchants Bank, walks you through the nuance between the two and underlines how getting pre-approved can help you prosper.

Pre-qualification vs Pre-approval

While some sources may use pre-qualification and pre-approval interchangeably, the two are very different.

“When pre-approval gets thrown around the web, most of the time, people actually mean pre-qualification,” Troy explained.

Pre-qualification is:

• An individual mortgage lender doing a credit check and deciding whether you might be a good candidate for a mortgage.
• A review of some supporting docs, such as income, assets, employment, credit, etc., that a specific lender may use to determine how likely you are to qualify.
• May or may not be a hard or soft credit pull, depending on your lender.

A pre-qualification is not:

• An agreement or guarantee of a loan.
• A set-in-stone amount.

“Pre-qualification is, essentially, a simple judgment call on the part of a single mortgage lender to give buyers an idea of whether or not they might qualify for a loan and how much that loan might be,” Troy said. In contrast, pre-approval is:

• A loan estimate that has gone through the underwriting process.
• A hard credit pull.
• A nearly complete loan file – minus title, appraisal, and property documentation.

“It’s not a complete loan because we don’t have all the items needed to close – like the house or title – so it’s still very conditional. But it’s a deeper look into the buyer’s situation and gives a much clearer picture of what they may be able to afford,” Troy explained. “In my time as a Mortgage Lending Officer, I’ve found that pre-approval tends to give buyers more confidence because they have numbers that are a bit more concrete.”

So, what are the benefits of getting pre-approved instead of pre-qualified?

1. Getting a Leg Up on Home Tours

Once upon a time, buyers could take their time touring houses, Troy explained. It was common practice to view a home and then, if you wanted to make an offer, go to the bank and begin the loan approval process. That’s not the case in today’s searingly hot housing markets.

“Buyers can’t really go out and look at homes without pre-approval or pre-qualification anymore,” he said. “If they try to do that and call a realtor for a showing, often the realtor will decline until they have that pre-qualification or pre-approval in hand.”

For this perk, either a pre-qualification or a pre-approval will work – and you should probably assume you’ll need one or the other unless you happen to live in an area with an extremely slow housing market.

2. Know What You Can Afford

Both a pre-qualification and a pre-approval are a good starting point to help you determine your homebuying budget.

“Often first-time homebuyers will have no idea what they qualify for, and a pre-qualification or a pre-approval can really help them puzzle that out,” Troy shared.

If you’re just making a general inquiry to get a vague idea of your budget, a pre-qualification will probably be all you need. However, if you’re a serious buyer who wants more details on what your monthly payments will look like or want to know exactly what you can afford, you may want to lean towards getting a pre-approval.

“A pre-approval will tell you your likely payments, how much of a down payment you’ll need, and more,” Troy said. “It’s a really in-depth look at your finances and what you can afford.”

3. Lean on Local Trust

Getting pre-approval from a trusted, local financial institution can also give you a leg up when making offers. Troy explained that sellers want to know there will be no hang-ups when they accept an offer.

This is why going with pre-approvals can really give you an edge – especially when that pre-approval is through a local bank that realtors and sellers are familiar with.

“I’ve had realtors tell me they got 12 offers on a house, but they selected my client’s offer because, while it wasn’t the highest, it was the only one backed by a bank, and they knew First Merchants’ reputation,” Troy shared.

4. Close Quickly

Perhaps most importantly, getting pre-approval from a trusted, local financial institution can help you close quickly.

“If you get a pre-approval, the loan is basically already done,” Troy explained. “We still need additional details, but you can close in two weeks if your appraisal is scheduled quickly. It’s almost as fast as purchasing with cash.”

5. Grow in Knowledge and Confidence

Finally, because a pre-approval is a closer look at your credit, lenders can alert you to any financial roadblocks or obstacles.

Troy said it’s not uncommon for a buyer’s credit to not be ideal or for them to be short on the money they’ll need to close.

“But if you get pre-approved before you need to go house-hunting, you get 90 days to work on those issues,” Troy said. “Sometimes knowing what’s holding you back is really important. So when they’re able to apply again at the end of three months, and we recheck it – they’re golden, they’ve done all the right things.”

And Troy works hard to ensure potential buyers are set up for success when it comes to reapplying.

“I work really closely with clients to educate them on the process and to help them find experts who can give them sound guidance on repairing their credit,” he said. “I make sure they’re educated throughout the homebuying journey, so they know what to expect.”

You don’t get that when you choose a pre-qualification instead of a pre-approval.

“In some ways, they’re both similar documents,” he explained, “but a pre-approval really comes with that education and knowledge baked in. It gives buyers the confidence to go out and face the market.”

Interested in getting pre-qualified or pre-approved? Talk with one of our attentive Mortgage Lending Officers!