As the real estate market begins to bloom with opportunities for homebuyers, for those who wish to buy in the next few months understanding the distinctions between pre-qualification and pre-approval for a home loan can be pivotal in securing your dream home.
If you are starting out on your journey to buy a home, one of the first things you need to do is determine what you will be able to borrow so you are narrowing the field to hone in on properties you are likely to be able to afford.
A couple of the terms you may have come across when you are at this stage of determining your borrowing power are ‘pre-qualification’ and ‘pre-approval.’ While these sound like they might be the same thing, there are some important distinctions between them a home buyer needs to understand.
Differentiating between pre-qualification and pre-approval
When applying for a loan, the main difference between pre-qualification and pre-approval lies in the depth of scrutiny and commitment from the lender, with pre-qualification more of a guideline and pre-approval being more solid.
Pre-qualification – a non-binding estimate
Pre-qualification is the first step in the mortgage process, providing an estimate of how much you may be able to borrow based on self-reported financial information. This preliminary assessment typically involves a basic questionnaire or a conversation regarding your income, assets, debts, and credit score.
There are some benefits to going through the pre-qualification process. It gives you a general idea of the price range of homes you can consider, guiding your initial search.
Pre-qualification usually does not involve a hard credit inquiry, so does not have any impact on your credit score and finally it provides early insights into potential financing options.
However, it’s important not to make the mistake of thinking a pre-qualification and pre-approval is a binding indication of how much a lender is willing to provide. As the information you provide is not verified, it’s considered less reliable and it’s a good idea to consider a pre-qualification as more of a ballpark figure of what you could potentially borrow.
Pre-approval – a detailed commitment
Pre-approval is a more rigorous process where a lender verifies your financial information and provides a conditional commitment to lend up to a specified amount under certain conditions. This involves submitting documentation such as wages, bank statements, and tax returns for thorough evaluation so you’ll need to get your financial house in order prior to the pre-qualification process.
At this stage we’ll work with you to review your options in terms of mortgage products and lenders. When you are ready to apply for pre-approval, the selected lender then verifies this information and performs a credit check to assess your financial situation in detail. Based on this verification, the lender provides a conditional commitment to lend you a specified amount under certain conditions.
The advantages of pre-approval for property purchases
As we enter the warmer months the housing market typically sees increased activity and competition among buyers, which is why obtaining pre-approval should be a priority if you are getting serious about buying. Pre-approval does not just provide potential lenders with a comprehensive view of your financial health, it also empowers and informs your decisions. Knowing your approved loan amount allows for more precise budgeting and confident negotiations.
Armed with a pre-approval letter, you can concentrate on properties within your budget range, optimising your time and efforts. In a bustling market, sellers are more likely to favour offers from pre-approved buyers due to greater assurance of financial capacity and the potential for a swift transaction.
Pre-approval will also enable you to move faster and can speed up the process of finalising your loan should you be successful in your bid for your new property. When you find the right home, the last thing you want is to miss out as your finance took too long.
Planning ahead for a successful purchase
If you are wanting to purchase in the next few months, now is the ideal time to start preparing for your home purchase journey.
Start your journey with confidence by chatting to us at the pre-qualification stage and obtaining pre-approval early, ensuring you’re well-positioned to capitalise on opportunities and achieve your homeownership dreams as the property market warms up alongside the weather.