Pre-qualified vs. Pre-approved
Pre-qualified vs. Pre-approved: Why Your Customers Should Know the Difference
Right now, record-low mortgage interest rates may be bringing in lots of buyers to your office, but how many are showing up with a pre-qualification or pre-approval letter in hand? Do they know the difference before approaching you to help them find a home?
There are many common reasons why clients may resist getting pre-approved — from being confident that they’ll be approved once they find a home to being in “window-shopping” mode. Regardless of where your clients are in the homebuying process, it’s important that they know the differences and benefits of pre-approval versus pre-qualification.
They may sound the same, but they are not. Let’s start by taking a look at the reasons why.
What Is Mortgage Pre-qualification?
Some lenders use the terms “pre-qualification” and “pre-approval” interchangeably. However, pre-qualification is generally regarded as the first step in the mortgage process. Lenders typically request that the buyer self-report details about their financial history, including income, assets, employment, debts and a general estimate of credit rating.
Lenders and Realtors may use this information to put together a financial picture of prospective buyers with a rough estimate of how much house they can afford. It gives Realtors an opportunity to explain the types of neighborhoods available to buyers along with some of the basics of the homebuying process.
For the buyer, mortgage pre-qualification generally does not involve a hard credit inquiry but at times it can. Many consumers are afraid that multiple inquiries from several lenders will hurt their credit score. On the contrary, multiple credit inquiries within the same industry do not hurt the consumer’s credit score if they are pulled within a 60-day period. This allows consumers to shop for loans with different lenders with confidence.
What is Mortgage Pre-approval and Why Should I Ask for One?
A mortgage pre-approval is as close as Realtors can get to confirming a buyer’s purchasing power because at this stage, prospective buyers have supplied mortgage lenders with specific information about assets, debts, employment and bank accounts, and the lender has likely pulled the borrower’s credit report.
With this information most lenders will also run the borrower through one of two automated underwriting systems, either Desktop Underwriter through Fannie Mae or Loan Product Advisor through Freddie Mac — the pre-approval letter should indicate if this was done.
In addition, a pre-approval letter typically provides buyers with information indicating how much they qualify for. Generally, these letters are good for 30 days and should be updated if there are any changes to the buyer’s financial information.
A mortgage pre-approval can deliver benefits to all sides of the real estate coin. In fact, there are many reasons why Realtors should request a pre-approval letter prior to getting in the car and driving around town to show properties.
Here are some of the top reasons why you should request a pre-approval letter before showing homes to a buyer.
- Seller May Request It – Homeowners don’t want a bunch of people traipsing through their homes who are not qualified to buy, especially during the high-volume days of an open house.
- Provides Solid Proof of Purchase Power – Not everyone can qualify for a mortgage pre-approval but those who do show that they are “serious” buyers.
- Buyer in Better Position to Negotiate – In a hot market, sellers may go with cash offers first but if they are not available, pre-approved buyers stand a better chance to make a deal and close.
- Saves Everyone Time – People don’t have a lot of time these days. That holds true for Realtors, sellers and buyers. If buyers are pre-approved for a $200,000 mortgage, it generally makes no sense for you to show them beachfront property.
Why Getting Clients Pre-approved Into a Price Range is Important
Even when you’ve got qualified buyers ready to look at homes, it’s not guaranteed you’ll be able to close on a deal. That’s because a pre-approval letter may not consider other factors that go into a mortgage payment besides principal and interest — namely property taxes, insurances and association fees if applicable.
Consumers should ask their lender to pre-approve them to the highest payment so the lender and/or Realtor can estimate the price range for the consumer based on the principal, interest, taxes, insurances, and association fees.
Prior to making an offer, lenders should use the information from the property the buyer would like to purchase and make sure that the borrower will qualify for the particular property.
Further, many states have homestead exemptions, which shield a portion of the home’s value from property taxes. And properties located in risky, low-lying areas may require buyers to purchase flood insurance, which can further affect the monthly payment.
These factors, when combined, can add up quickly to monthly payments sitting well outside of what the buyer was initially pre-approved for, which is why it’s very important to get qualified buyers backed into mortgage payments based on a price range rather than just a purchase price.
The Bottom Line
Cash is generally regarded as king when it comes to buying a home but since most people don’t have hundreds of thousands of dollars in the bank, qualifying for a mortgage is usually necessary. Although lenders may handle mortgage applications differently, pre-qualification is generally regarded as a first step because it’s typically a less rigorous assessment of the applicant’s ability to qualify for a loan. For many Realtors, pre-qualification is merely a financial snapshot of the mortgage your client “might” qualify for.
A pre-approval, on the other hand, is akin to a “golden ticket” for Realtors because the lender has reviewed the buyer’s information and pulled a credit report. This can provide Realtors with a tremendous advantage in a competitive market due to the reliability of the lender’s assessment. Given the variance in mortgage payments due to the cost of insurances, taxes, and association fees, lenders should qualify potential buyers to a mortgage payment and back them into a price range rather than just qualifying them to a purchase price.
When your clients are ready to buy a home, know that Hamilton Home Loans Mortgage Advisors are available to make the process simple. Our simplified process means we can get your clients pre-approved quickly and we offer special incentive programs, such as Hamilton for Heroes — special mortgage benefits for military veterans, first responders, nurses and physician assistants.
Click here for more information.
SVP, National Production Executive
Hamilton Home Loans