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Pre-Approval or Pre-Qualification, which one do you need?

As you begin shopping for a new home, you’ll obviously be researching financing. Two letters you’ll hear about are either pre-approval or pre-qualification letters, or both. While there are some similarities, the differences are VERY important. Let’s go over the two and why you should pick one over the other.

Pre-Approval or Pre-Qualification, Which One do you Need?

Disclaimer: I am not a certified accountant or financial advisor. My opinions come from the point of view of a real estate agent. Make sure you consult a qualified financial advisor if you need professional financial advice.

Similarities Between Pre-Approval and Pre-Qualification

Both are going to help you estimate the loan amount you may likely qualify for. This will help you get started and make sure you stay within your price range. They are also both going to help show sellers that you are a serious contender when putting in your offers. And most importantly, both are NOT a guarantee that the lender will actually loan the money for the home. Only that they are willing and able to.

Differences Between Pre-Approval and Pre-Qualification

Honestly, the differences between the two are usually defined by the lender you are talking to. A pre-qualification is usually the first step, but typically doesn’t require a credit check. It also usually doesn’t require documented financial history, rather just your word on your financials.

Assuming the lender is following the typical definition, a pre-approval is more in depth. It usually requires a credit check, documents on your financial history, and in depth analysis of your ability to handle your finances. At this point, you will end up with a hit against your credit report.

The key to knowing which one to get lies in the credit report. Ask the lender what they say the differences are between the two. And most importantly, ask them if what they are doing requires a full credit check. That will be your clue that they are actually doing an approval and not just a qualification. So should we get a pre-approval or pre-qualification? My opinion is the pre-approval.

Get Yourself Organized Before Getting your Pre-Approval

There are a few documents you need before talking to the lender. They will want to prove a few key things. Who you are, what you earn, what you owe, what you spend, what you own, and that you are financially consistent and stable. They may also want to know some details about the types of houses and price range you are looking to buy in. Before you get started, go ahead and get a copy of your credit report from all 3 agencies to make sure you can clean up or dispute anything negative on your reports.

Get these together and ready:
  • Copy of your social security card and driver license (or equivalent).
  • For a VA loan, you’ll need your DD214 long form, Benefit Verification Letter, and Certificate of Eligibility (get these from the VA).
  • Document proof of income from other sources (social security, pension, rents, tips, dividends, etc).
  • Document proof of any assets along with value (accounts, property, etc).
  • Your most recent bank statement.
If you are employed:
  • Last 6-8 weeks of pay-stubs.
  • Last 2 W-2s from your employer.
  • Two most recent IRS Form 1040s (individual tax return).
If you are self-employed:
  • 3 most recent full federal tax returns.
  • 3 most recent returns for your business if it’s filed separately.
  • Profit and loss statement for your business covering at least the last 12 months.
  • List of all debts your business owes that you are personally liable for.
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