Mortgage Pre-approval Vs. Pre-qualification: Which Should You Get in NYC?

Buying a home can be one of life's most significant financial transactions. But let's be honest: it's not easy. To secure a mortgage, you must take two critical steps: pre-qualification and pre-approval. Perhaps you're already familiar with these terms. However, many homebuyers mistakenly believe these two steps are interchangeable. There are, however, significant differences you need to know.

In short, pre-qualification gives you an idea of what you can borrow, while pre-approval tells you exactly how much. We break down those similarities and differences below to ensure you're fully informed. So, if you're currently searching for a new home, read on to determine which step deserves the most attention.

Mortgage Pre-Approval Vs. Pre-Qualification

Getting pre-qualified with a lender can help you determine how much of a mortgage you can afford and if you might be a good candidate to qualify for a mortgage.

Pre-approval is a more involved process that should be visited once you are ready to search for a home and place an offer.

Pre-qualification does not require proof of income or any documentation, while the pre-approval process does, including a hard pull on your credit.

• The pre-approval process requires proof of ID, income, assets, and a credit check.
• Getting your pre-approval letter ahead of house hunting or making an offer ensures that you can make an offer on the house as soon as you find the right one.
• Pre-approval letters expire within 60-90 days, so if you don't find the right property in time, you must return to your lender for a second letter.
• Pre-qualification is not as essential as pre-approval, but it is still beneficial for a first-time buyer.

What is Prequalification for a Mortgage?

Prequalification is the initial step in a mortgage transaction designed to determine your borrowing power.

The figure quoted by your lender will allow you to customize and tailor your search for a home you can afford.

At this stage, you shouldn’t be going to open houses.

Instead, it would be best to concentrate on going to a lender’s office to start the home buyer’s process.

Prequalification is an Easy Step in Your Journey to Find a Home

Prequalification is an easy step in the home buyer’s journey to purchase a house because you don’t have to do much.

The prequalification stage only asks for finances given to your lender verbally.

You only need to tell a lender your name, contact info, income, and a general overview of all your debts and assets.

You can give a lowdown on your finances to a lender with one quick call, a simple email, or in person.

In most cases, the lender will quickly give you a prequalification on the spot.

Since informing the lender requires no physical proof, the lender must only take your unverified information to determine how much you will likely be approved for.

In verification, in most cases, your lender won’t do a credit check, although a soft inquiry may be required for some.

A soft inquiry doesn’t affect your credit score. A soft examination or no credit check is a benefit of prequalification.

New or first-time buyers should know that getting pre-qualified doesn’t always mean they’ll be able to get approved for the mortgage.

Significantly, potential pre-qualified homeowners should be cautious about the homes they’re looking at because the ballpark offer may change when you start getting a mortgage in the preapproval stage.

Significantly, your loan amount based on a prequalification is less accurate than a loan based on a preapproval.

This step is most beneficial to the buyer rather than bearing significance to a seller or an offer.

Read on: What You Need to Know Before You Buy Property in New York

What is Preapproval?

Being pre-approved for a mortgage differs from a prequalification because this step requires physical proof of your finances.

Your lender will check your credit score.

The lender is looking for all the details or possible blemishes that affect or have affected your score.

In doing so, the lender will inform the buyer of the maximum amount of money the lender will allow you to borrow.

The Difference Between Prequalification and Preapproval

The significant difference between a prequalification and a preapproval is that the former is less rigorous when determining your loan, and the latter is not.

At this early stage, the lender will decide if you can move to the second step, preapproval.

This is also when the lender has decided if you will likely be approved for a mortgage loan up to a certain amount.

Any borrower needs to be aware that while this vetting process can predetermine your ability to secure a loan, it does not guarantee that you will get a loan commitment from the lender, which the underwriter later determines.

The decision is based on your current financial situation, which means that you should gather your finances and ensure there are no surprises, such as unpaid hospital bills you failed to make and are now in collections.

Why is Preapproval Necessary?

The preapproval stage is critical because many sellers will not look at your offer in a competitive real estate market unless you have a letter stating you’ve been pre-approved.

That’s because home sellers know that prequalification is easy to get and thus holds little weight.

But the doors open wide when you have been pre-approved.

With a preapproval letter, you can show that a bank already sees you as a good borrowing candidate.

It communicates to a seller that you are serious about buying a home, and the seller will then entertain your offer in earnest.

The preapproval proves your credibility and will likely buy the seller’s home.

Significantly, once homebuyers find out exactly how much they can spend, they can be more realistic about the price of the house they are interested in.

In other words, this is when the homebuyers can assess their comfort level and adjust accordingly on the house to consider their preapproval quote.

Note that the lender will likely give you a loan that is far too much to spend on a dwelling.

Some uneducated buyers will use the highest amount, not considering the fees and closing costs that all homeowners must pay once they purchase their dream home.

These include HVAC, pool maintenance, lawn maintenance, buying new furniture, and the maintenance of the house itself, as well as potential HOA fees.

These things and more may put potential homeowners above their comfort level.

What Happens in the Preapproval Stage?

Unlike prequalification, the lender will look for proof of finances to ascertain if you can carry a mortgage.

This means more than verifying your credit score.

The difference between being pre-qualified and pre-approved becomes more salient when you realize the former considers your financials by word alone while the latter looks at some documentation.

What Do You Need to Supply Your Lender to Get Pre-approved?

The following is the documentation and steps your lender requires to receive pre-approval-.

Proof of Identification

Lenders need proof of identification from potential buyers.

This means giving the lender your driver’s license number or a passport if you don’t have a license.

The lender will also need your social security number to pull your credit report.

Fact-Checking

The lender will fact-check your financials to make sure you aren’t falsifying anything and to ensure that you don’t have too much debt on hand, which will raise a red flag and may result in the lender rejecting you from a loan or lowballing you with a high percentage rate.

And all of this is even before you start looking for a new home.

Proof of Income

Homebuyers must show W-2 wage statements from the last two years, any documentation that shows year-to-date income like pay stubs, federal tax returns from the previous two years, and proof of miscellaneous income such as end-of-year work bonuses or alimony.

Proof of Assets

To prove that potential buyers have funds for the down payment and closing costs, lenders must look at bank statements for several years, any investment account statements, and their debt-to-income ratio (DTI).

Credit Check

Here’s more detail on a credit check.

Lenders require homebuyers to have their FICO score to approve the mortgage loan.

The magic number is a score of 620 or higher for approval.

For those who’ve spent years paying their mortgage and bills on time and have great credit—a score of 760 or higher—lenders usually offer such homebuyers their lowest interest rates.

Just remember that the lower your score, the higher your interest rate.

Maintaining good credit always works in your favor. If your score is low, you may be required to make a down payment more significant than you had anticipated.

Employment Verification

To get pre-approved, a lender will look at how many years you've been at your job and, if it's been temporary or short, like one to two years, the lender will have no choice but to contact your previous employer.

The lender is looking for stability, so even if you hold a job for a significant number of years, the lender will want to see your pay stubs and call your current employer to verify your employment and salary.

What Happens After Your Finances Have Been Verified?

After the lender finds that your finances are in order, the lender will be confident that you can make the down payment and pay your monthly mortgage statement comfortably.

The lender then gives you the exact amount of what you can borrow.

Do Preapprovals Expire?

A pre-approved loan can expire after 60 to 90 days, especially if your financial forecast changes.

If you lose your job or take on new debt, like opening up many credit cards and then maxing them out, or if you have just had a baby, your lender in this situation also has the right to decrease your loan.

However, preapproval is not the last step in securing a loan.

The lender may have granted it, but in most cases, they will likely want to approve the home first and further vet your assets and debt.

Learn more: How to Put in a Purchase Offer for an Apartment in NYC

What's the Best Time to Get a Mortgage Preapproval?

Like pre-qualification, the best time to get mortgage preapproval is in the early stages of buying your home, before you embark on shopping for a home.

This is the Time to Look for a House

Once you have supplied your lender with all the information above and the lender doesn't find any significant red flags in your finances, you will receive your preapproval letter.

For potential homebuyers, this is where you get realistic and choose a home at a lower price point to consider all your expenses.

Probably the Best Decision You'll Make

After getting pre-approved, the most important thing to know is that once you find your dream home, buying it happens quickly.

If you make an offer on a home, you don't have to rush to a lender.

You already have a pre-approval letter you can present with your offer to show the seller you're not just serious about buying but can also seriously buy it.

Does It Take Long to Get a Mortgage Preapproval?

If you come prepared, have organized your paperwork, and made copies of it for the lender's benefit, you probably can get a mortgage preapproval on the same day you visit your lender.

However, the approval will be delayed for those deep in debt, with a low credit score, and who have maxed out their credit cards.

By how much? It can take from a few days to several months.

Which is Better? Preapproval or Pre-qualification?

Both preapproval and pre-qualification are worth it.

A pre-qualification, based on the information you've given to your lender, is a verbal process, a representation of your finances that doesn't require documentation.

While not mandatory, it's a good idea not to avoid this step.

In the early stage of your house hunting, a pre-qualification can indicate what you will likely qualify for.

Just note that the pre-qualification doesn't hold the same clout as real estate agents or sellers.

But it can be a great tool when searching for a home, as it allows you time to compare and contrast other homes or other areas and neighborhoods, as well as allows you to eliminate homes you may be interested in that are beyond the estimated figure that your lender has provided to you.

Meanwhile, a mortgage preapproval is also a step you can't avoid.

While pre-qualification doesn't require documents to back up your financial claims, in this step, a rigorous review of your finances with proof will decide how much of a loan the mortgage lender will feel comfortable giving you.

Now that accurate, complex data have backed up your finances, your lender will approve your loan, and it will be accepted as confirmation that creditors will fund your loan and communicate to the seller and your broker that you can afford the home you're looking at.

A pre-qualification gives you an estimate of what you can borrow and can afford, and a preapproval takes it one step further by telling you what you can borrow.

Still, both give you the same information.

They tell you early in your home search how much you can afford, saving you time from finding your dream house only to discover that it is way out of your price range.

Choosing Between a Pre-Qualification and a Preapproval

If you must choose between pre-qualification and preapproval, you should go with the latter.

The pre-approval stage signifies to sellers and brokers that you are interested in the seller's property and have the funds to make a serious offer.

After preapproval, the final steps to the closing involve having the buyer's potential home appraised by the lender.

Final loan approval occurs after the appraisal and the loan is applied to a property.