Most people looking to buy a home know that they need to apply for a loan and they might have heard about been pre-qualified or even pre-approved. To many these two terms mean very little. However if you want to be a successful home buyer knowing the difference can be very helpful.
I want to stop here and mention that I know buyers are anxious about the loan application and the nightmare document requirements that ensues once you start the process. So many buyers simply prefer to get a pre-qualification note from a lender and then start a home search. Honestly; this is a mistake. A pre-qualification simply means a lender has asked you very basic questions such as your credit score or your income. Then at the end of this shallow investigation you are given the pre-qualification letter. The lender is just saying there is a chance we would lend you X amount of money if everything you are telling us is true.
A pre-approval on the the hand requires a deep dive into your financials. The will need your tax returns, income, bank statements and more. So when you receive the pre-approval it means the lender has a very strong indication that you will be approved for this X amount of money.
For most buyers the terrible lesson occur after they make an offer and then they are told; YOU DO NOT QUALIFY FOR THIS LOAN. Another painful lesson is making an offer on a home that you love only to lose it to someone who is pre-approved. Its ok to start looking with that pre-qualification but get- pre-approved; ITS THE SMART THING TO DO.