Home sellers don’t want to waste their time on buyers who can’t get financing — so if you’re shopping for a new home, it’s smart to have proof that mortgage approval won’t be a problem. Here’s what you need to know about mortgage pre-qualification and pre-approval.
Pre-qualification 101
Mortgage pre-qualification is an introductory conversation with your prospective lender about your income, employment history, savings, credit and other debts. It doesn’t involve verification of your credit or finances.
The lender uses this information to calculate the amount you can afford to pay on a mortgage and creates a pre-qualification letter to show you’re a serious buyer. Because the lender hasn’t checked your information, pre-qualification is a preliminary step that doesn’t guarantee you’ll qualify for a loan.
Download Our Pre-Qualification Checklist
Pre-approval basics
During the preapproval process, the lender runs a credit check and examines your financial health more carefully. You’ll then receive a conditional mortgage pre-approval letter, contingent on your chosen home’s appraisal, title info and purchase contract, as well as your final income and asset verification. A pre-approval is usually valid for a limited time. It’s not an absolute guarantee of approval, but it’s a solid indicator you’ll get your financing, which sellers and realtors respect.
What determines pre-approval?
Lenders consider three major factors in mortgage pre-approvals:
- Credit: Lenders want evidence you’re likely to make your payments, so a credit score of 700 or higher is best. You might qualify for financing with a lower score, but odds are you’ll pay higher interest.
- Income: This shows how you’ll repay your mortgage. A debt-to-income ratio of 36% or below is optimal, and the figure should not exceed 43%.
- Assets: You’ll need to show you can make the required down payment.
The bottom line
Of the two options, pre-approval carries more weight because your information is verified. And the pre-approval process uncovers financial issues when there’s still time to correct them. Both choices, available through financial institutions like Heartland Bank, can help you set a realistic home-buying budget and present yourself to sellers in a favorable light
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First-Time Home Buyer’s Guide
If you’re thinking about buying your first home, a great place to start is with our First-Time Home Buyer’s Guide, which provides all sorts of advice, tools and tips for the home buying journey. It will give you a clear picture of what to expect all along the way. View or download the guide today for the information you need to make a sound financial decision.
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