In a competitive real estate market like metro Phoenix, home buyers–especially first time home buyers–need to use any edge they can to make them more appealing to sellers. Apart from having wheelbarrows full of cash on hand, probably the best thing they can do to increase their chances of making a successful offer on their dream home is to get pre-approved for a home loan. Doing so gives a buyer an advantage over other potential buyers who have not taken this step or who have only been pre-qualified for a loan.
Similarities and Differences
Getting pre-qualified and getting pre-approved both give buyers a price range they can focus on in their house hunt. This will keep buyers from looking at (and getting emotionally attached to) homes they can’t afford. If all a buyer wants is a general idea of what they can buy and there’s not a lot of urgency, getting pre-qualified is sufficient. If, however, a buyer comes across a particular home that they simply must have, being pre-approved gives them the ability to make an offer on the spot. This readiness to buy without waiting for approval or other contingencies makes them far more appealing to sellers who are ready to sell.
To get pre-qualified, a buyer provides a lender with a basic overview of their financial situation. They report their income, debts, assets, liabilities, etc. to the lender who in turn tells them how much money they should be able to borrow based on what they reported. It is important to note that getting pre-qualified doesn’t require the borrower to produce documentation to support their claims about their financial situation and isn’t a guarantee that a lender will approve a mortgage in the amount of the pre-qualification.
Pre-approval is more formal than pre-qualification. Borrowers have to provide copies of their taxes, pay stubs, and other financial paperwork to support their financial claims. The lender will run a credit check on the borrower and then determine the borrower’s true capacity to pay back a loan based on all of these pieces of information. On that basis, the lender will issue an approval for whatever amount they already know the buyer can afford. The only requirement is that the house the buyer wants to purchase has to appraise for at least the asking price.
A Helpful Analogy
Here’s an analogy that might help. Let’s say two kids want to hang out with friends on a Friday night. The first kid calls his mom at work and asks her for permission. She asks him if he’ll be finished with his homework and cleaning his room. He promises her that he will. Based on his self-reporting, his mom says, “Yes, you can probably go out with your friends.”
In this case, the mom’s approval is conditional. It’s a qualified “yes.” What it really means is, “You can go out with your friends, provided you’ve really have finished your homework and cleaned your room by the time I get home from work.” If the mom comes home and finds things are not exactly as the kid reported, the kid will not be allowed to go to the party. He was pre-qualified, but not pre-approved.
The second kid on the other hand, wants to make sure he can go out with whomever he wants. He approaches his mom before she goes to work and says, “I’m probably going to be invited to go out with some friends tonight. Will you come and see that I’ve done all my chores and homework and give me your permission to out ahead of time?”
In this case, the mom would be basing her decision on her own investigation, not on her son’s self-reporting. She’s taken the time to confirm that her conditions for approval have already been met. In this case, the kid would be pre-approved to go out.
So, while both pre-qualification and pre-approval can give buyers a price range to focus their house hunt, the confidence one gains from being pre-approved and the ability to take immediate action on a house one likes make the extra effort of getting pre-approved totally worth it.
If you think you are ready to get pre-approved for a loan to buy the home of your dreams, contact AZ Mortgage Brothers today. We are ready and willing to help!