By: Todd Rusteberg, REALTOR, Keller Williams Experience Realty
When it comes to the home-buying journey, cash reigns supreme, yet not everyone has a hefty sum stashed away to pay cash for one of the largest and most personal purchases they will make in their life. Only 14% of all homebuyers pay cash, according to the National Association of REALTORs. Those who apply for a mortgage—whether it’s out of necessity or by choice—still must pay some upfront cash.
Securing a mortgage is a requirement for most home buyers and this article is intended to help you understand the difference between being pre-qualified vs. pre-approved when shopping for your next home. Obtaining mortgage pre-qualification or pre-approval is crucial, signaling to lenders that you possess the financial capacity to meet payment obligations.
However, it’s essential to recognize that pre-qualification and pre-approval are significantly different. A pre-qualification letter is certainly better than nothing, but if you want to add more weight to your offer for your next home, a pre-approval letter will do just that.
So, what exactly is mortgage pre-qualification?
Pre-qualification implies that a lender has assessed your creditworthiness and tentatively determined that you are likely eligible for a loan of a certain amount. However, the catch is that the pre-qualification letter is typically an approximation, not a firm commitment. It relies solely on the information you provide to the lender and their assessment of your financial outlook.
This evaluation is based on the details you’ve disclosed, often without factoring in your current credit report. Additionally, it does not delve beyond the statements you’ve made about your income, assets, and liabilities. Essentially, pre-qualification offers a financial snapshot, providing an estimate of the mortgage amount you might qualify for. It can be beneficial if you’re just starting the home-buying process and are unsure about your financial standing.
Now, let’s explore why mortgage pre-approval holds a distinct advantage.
A pre-approval letter is the real deal – a declaration from a lender that you qualify for a specific mortgage amount based on a comprehensive review by an underwriter. This review encompasses your credit report, pay stubs, bank statements, salary, assets, and obligations. Unlike pre-qualification, a pre-approval is a more concrete commitment, contingent only on the appraisal of the chosen home and provided your financial situation remains stable until closing.
This positions you as close to a cash buyer as possible, providing a significant edge in a competitive real estate market. In fact, pre-approval letters, when coupled with clean contracts devoid of numerous contingencies, have even outperformed all-cash offers in bidding wars. The reliability and simplicity of a pre-approved offer stand out, giving you a competitive edge in negotiations.
In conclusion, prospective home buyers should take note – while pre-qualification offers a preliminary insight into a lender’s willingness to provide a loan, a pre-approval letter makes a more powerful impression on sellers, assuring them that you have the financial backing to support your offer.
If you are in the market for a new home or looking to sell your existing home, feel free to reach out to me for a no-obligation assessment of your real estate needs. Call Todd Rusteberg at 773.960.7582 or email me at [email protected]. You can also download my app at toddrusteberg.kw.com and begin your home search today!