PRE-QUALIFIED VS. PRE-APPROVED WHAT’S THE DIFFERENCE?

Buying a new home is a big step. It's not just the biggest purchase most Americans will make, but it's also one of the most complicated and time-consuming transactions you can undertake. It can take months ... even years to find and buy a new home. But there is light at the end of the tunnel: With proper research and planning, your home buying process can be a smooth, straight path to the New American Dream.

As you get your home-buying ducks in a row, it's important that you understand the difference between pre-qualification and pre-approval. These two concepts are closely tied to each other since they both help determine how much of an "offer" you'll have when looking for a new house... But many people wrongly use them interchangeably.

What does pre-qualification vs. pre-approval mean?

Pre-qualification vs. pre-approval is a distinction that can have a huge impact on your home shopping experience – especially if you've found the home of your dreams and are trying to make an offer. In short, pre-qualification vs. pre-approval means:

Getting "pre-qualified" for a loan can help you determine how big of an offer you should make when buying a new house Getting "pre-"approved will give you a solid number that prospective sellers can rely on as proof that you're capable of getting the financing needed to seal the deal

Let's look at what each term means in more detail.

What does it mean to be pre-qualified?

Pre-qualification applies to the first step of the home buying process, where you decide on a lender that will finance your house purchase. It's important to note that pre-qualification vs. pre-approval are two different animals. Pre-qualification is just an approximation of how much money you'd be eligible for at this stage in the game – it's not official until you get "pre-approved."

So what does it mean if you've been pre-qualified but not again approved yet? That means there's still work to do before you can seriously shop for houses and make offers on your dream homes!

When finding out if you're pre-qualified, lenders will ask for some basic information from you. They'll want to know how much your monthly income is, what debts you have left from prior home purchases (if any), and the approximate value of any real estate that you own.

In addition, they may require that you supply them with a copy of your credit report – which will help determine if you'll be approved for a loan through their office.

What does it mean to be pre-approved?

Pre-approval takes a few steps further than pre-qualification because the lender actually investigates your credit record and references to make sure that there aren't any deal breakers lurking in either location. Pre-approval also requires that you provide bank account statements as well as proof of income before the lender will move forward.

The benefit of pre-approval is that it gives you a solid number to take with you when you're ready to purchase a house. It's basically like telling the seller: "Don't worry, I'm definitely capable of getting this loan… and here's proof!"

With pre-approval, the lender will pull your credit report and crunch some numbers based on how much money they think you should be able to borrow. When issuing approval letters (or pre-approvals), lenders use something called DTI – or Debt-to-Income ratios – as their primary means for determining eligibility. Specifically, they'll look at what percentage of your monthly expenses are represented by housing costs vs. gross monthly income.

What is DTI and what does it mean?

DTI is short for Debt-to-Income Ratio . It's an important number that lenders use to determine how capable you are of making your monthly mortgage payments. Most major lenders will approve applicants who have a DTI ratio no higher than 31%. And just to be clear, this includes all housing expenses – not just the monthly loan payment itself.

If you've got a high DTI (i.e., above 31%), then most lenders won't even consider you for approval… and if they do, it'll be with certain terms and conditions in place (for example: big down payment, extra risk fees). If your DTI is above 43%, then it may be very difficult to get a mortgage at all.

Even if you have a high DTI, it doesn't mean that your application won't be approved! The key is to find a lender who is willing to work with your specific situation.

Recap

If you're still looking for your first home, get pre-qualified with a lender so that you know how much house you can afford . When it comes time to make an offer on your dream home, get pre-approved instead of just pre-qualified.

This step will prove to the seller that you're capable of getting financing and also give them something concrete to work with when coming up with an appropriate offer price.