Prequalification vs. pre-approval when house hunting

Want to purchase a home and not sure where to start? Curious about what loan amount you will qualify for, how much home you can afford and how to secure the home of your dreams after you see it?

For homebuyers ready to purchase a home, taking the first step toward obtaining a home loan might involve answering those questions and having your ducks in a row before you ever set foot inside a home on the market.

“Purchasing a new home is very exciting, but the process can be bit complex,” said David Hyde, regional home loans manager at BOK Financial Mortgage®. “The more prepared you are before you even begin the homebuying process, the better off you’ll be down the road.”

This preparation means more than simply knowing your credit score; it means understanding your budget, being realistic about the long-term affordability of the home you’re looking to purchase and having the right documentation ready when needed.

As buyers begin to look at potential properties with a local Realtor® and calculate how much they can spend, turning to a trusted lender for support and guidance through the process can be beneficial as well.

“Working with a knowledgeable lender early in the process who can help with prequalification and pre-approvals can make all the difference for a homebuyer,” Hyde said.

The ins and outs of prequalification and pre-approval
Prequalification is a quick, informal estimate based on the basic financial information you provide verbally or through a simple form. During the prequalification process, documents aren’t typically required. Although the lender doesn’t verify your income, assets or credit score in detail, prequalification can give you a rough idea of how much you might be able to borrow for a home.

“Prequalification is a relatively easy process to get the homebuying process underway,” Hyde said. “It will provide a homebuyer with a good idea of what they might qualify for, but it’s not a guarantee.”

While a prequalification letter provides homebuyers with an estimate of what a bank will provide in the form of a loan, the estimate may change as financial information is provided and the process becomes more formalized.

Pre-approval, on the other hand, is more thorough. In this process, a lender actually verifies the financial information provided and issues a conditional commitment letter stating the specific loan amount you qualify for, assuming the property meets the lender’s requirements. This process usually takes a few days and may come with an application fee in some cases.

Documentation that needs to be provided for a pre-approval includes:

• Pay stubs
• Tax returns
• Bank statements
• A credit check

“Pre-approval is becoming the new standard,” Hyde said. “For many homebuyers we’re reviewing credit, income and assets up front and arming them with a pre-approval letter, so the only thing missing is the house.”

Why pre-approval can mean more for buyers
Buyers who are pre-approved carry much more weight in the homebuying process. Sellers and real estate agents take pre-approved buyers more seriously because there’s an actual underwriter review behind the approval. In competitive markets, a pre-approval letter can make an offer stand out and might be required just to view certain properties.

“Pre-approval also can give buyers a more accurate picture of their budget and can speed up the final loan process once a home is found, since much of the financial review is already complete,” Hyde said. “In a competitive market with limited inventory, buyers need every advantage.”

According to Hyde, having the buyer complete the pre-approval process prior to house hunting helps both buyers and sellers avoid surprises during escrow and can help expedite the process.

Three factors to consider before starting the process
While pre-approval can be a major step toward purchasing a home, it’s important to consider all of the factors that go into the decision to move forward with this kind of large purchase. These include:

• Credit score: Understanding your credit score and how it impacts your ability to get a loan is critical during the homebuying process. Lenders use credit scores (which range between 300 and 850) to decide whether to approve you for a mortgage loan and what interest rate to offer you.
• Budget: A critical piece of the puzzle is learning where your money goes each month and how much you have available to spend on a new home. This is where budgeting can come in. Generally, financial advisors recommend spending no more than 30% of your gross monthly income on mortgage payments.
• Long-term affordability: Buying a home is the first step but maintaining it can be another realm altogether. It’s important to consider factors such as home maintenance responsibilities and costs, utilities and ongoing expenses, insurance requirements, as well as property taxes and how they might change when considering what you can afford to spend.

“Buying a home can be a complicated process but having a solid understanding of the resources available to you as a buyer and identifying trusted sources of information in the journey can help you navigate with ease,” Hyde said.