Today we’ll be talking about what is a pre-approval or pre-qualification.
We’ll also talk about what kind of documentation you may need to get that letter.
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Let’s talk about what is a pre-approval or pre-qualification letter.
We’ll also talk about what kind of documentation you may need to get that letter.
Let’s start at the beginning, a pre-approval or pre-qualification are both letters that your loan officer will create that states how much of a loan you could be approved for. This letter is used while you are shopping for homes as well as when submitting offers on homes.
A pre-approval and a pre-qualification letter are actually quite different when it comes to how strong they are.
Pre-approval
A pre-approval letter is the stronger of the two because in order to get a pre-approval letter, you have to actually apply for a loan.
The application will ask for your employment information, your income, your debts, and your assets.
Based on that information, the lender will pull your credit report and do what’s called a “hard credit inquiry.”
This will temporarily lower your credit score by a few points, but it will give the lender a more accurate picture of your financial situation.
Once the lender has all of that information, they will then determine how much of a loan you are approved for and they will send you a pre-approval letter.
Pre-qualification:
A pre-qualification letter is not as strong as a pre-approval letter because you do not have to actually apply for a loan to get a pre-qualification letter.
To get a pre-qualification letter, you simply provide the lender with some information about your employment, income, debts, and assets.
Based on that information, the lender will give you a letter stating how much of a loan you are qualified for.
As you can imagine, since the information hasn’t been verified the pre-qualification letter isn’t as strong as a pre-approval.
Now that we’ve gone over the difference between a pre-approval and pre-qualification letter, let’s talk about what kind of documentation you may need in order to get either one of those letters.
For a pre-approval letter, you will need to provide the lender with your last two years of tax returns, your last two months of bank statements, and your most recent pay stubs, your social security number, your date of birth, an official identification, and any other documents that show income, debts, or other payments you may be making or receiving like alimony or child support.
For a pre-qualification letter, you will not need to provide the lender with any documentation. You will simply need to give the lender some information about your employment, income, debts, and assets.
Now that you know the difference between a pre-approval and pre-qualification letter, and what kind of documentation you may need to get either one of those letters, you’re on your way to being a more informed home buyer.
When are these used?
The letters are used when your agent is making appointments for you to see homes. They’re typically used to ensure that the people coming through looking at the homes for sale are already qualified buyers. If you don’t want to get a pre-approval, or want to look at homes and are not in the market to purchase, going to open houses are the best options. COVID also had a bigger impact on this, as in years past it wasn’t as much of a requirement to have a pre-approval to tour a home. As people are preferring to reduce the amount of people in their home, this helps keep that number to just those who are in the market and could purchase the home.
The second time these are used is when your agent is submitting an offer. They put together a packet which will include this letter, helping ensure that the sellers know you have gone through the process and a lender has stated that you have the funds and means to purchase the home.
And finally, let’s discuss how long this process can take.
Most pre-approvals take a lender about an hour to input into the system and run the numbers. The more complicated your finances, the longer this process takes. Some items may need to be run by the processor or underwriting teams to ensure it is being calculated correctly. That can add an extra day or two to the overall time.
If your finances are not complicated, you can expect a pre-approval the same or next day. If it takes any longer, this usually means your finances are more complicated or your loan officer may be busy and not able to dedicate enough time to your file.
If you have any questions about the loan process, or if you’re ready to start shopping for homes, we can help you get started.