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For Sale by Owner Guide

Guide for Buyers

See all Buyer Guide topics

Pick the Right Lender

Loan Pre-Qualification vs. Pre-Approval

You will hear these two terms used interchangeably; however, there are very significant differences between being pre-qualified for a mortgage and pre-approved for a mortgage. This distinction can make the difference between knowing your contract is solid at the beginning of the transaction or having it fall apart in the middle.

Being pre-qualified for a mortgage essentially means the buyer has spoken to a loan officer or has made online application for pre-qualification. Generally speaking, the buyer has provided their income, their debts, their assets and, usually, their social security number for a credit check. The lender then runs the credit check, computes the debt to income ratios based on the information provided and gives a nod to pre-qualification. This pre-qualification is subject to all information being verified and found satisfactory to the lender. This is where potential difficulty is possible. For instance, if the buyer provided information about their income that seemed right to them, but the lender calculates the income a different way (usually in the case of self-employed or commissioned individuals), the income will not hold up and the loan can possibly be rejected. Or if a buyer provides an asset amount to be used for down payment and closing costs and it is later discovered that the buyer is borrowing the money from his father. The buyer thought the money would simply be counted as his, but the lender doesn’t accept this source of funds. The loan could ultimately be rejected. Pre-qualification is a step in the right direction, but it is only a step.

Pre-approval, on the other hand, actually requires the buyer to provide all the necessary verification to support the loan application. This generally includes bank statements, pay stubs, W-2 forms and a credit report. When the lender issues a pre-approval, it is just that, an approval. It is subject only to the buyer finding an acceptable property within the pre-approved price range and having a satisfactory appraisal completed. Of course, problems could still crop up with the appraisal, but a pre-approval is a much stronger and more certain position. Most lenders are happy to issue a pre-approval within a few days of loan application.

Apply for a Loan

The first step in getting the money you need to buy your next home is pre-qualifying for a mortgage loan. By pre-qualifying, you will have an approximation of how much lenders may be willing to lend you, based on the preliminary information you will provide.

Having this information can help narrow your home search to homes that you are most likely to be able to afford.

Information Needed at Loan Application

Most lenders will need the following information at the time of application. The more prepared you are, the smoother and faster your application can be approved. The lender may have additional requirements. (This is a general list.)

Income Verification

If you are salaried:

  • 2 years W2's
  • 1 month of most recent pay stubs

If you are self-employed or commissioned:

  • 2 years tax returns
  • Year-to-Date Profit and Loss or evidence of year-to-date earnings

Down Payment & Closing Cost Verification

  • 2 months most recent bank statements
  • 2 months most recent stock statements
  • 2 months history on other asset accounts
  • Copy of your purchase agreement if you have chosen a house
  • Money for appraisal and credit report

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