Pre-Qualification and Pre-Approval – The Difference

Before you begin house-hunting, it’s best to know from your lender if you pre-qualify or are pre-approved for a loan. The distinction between the two is that pre-qualifying determines how much a lender will lend you. It involves obtaining a letter from the loan officer who looks at your debt ratios, gross income, and work history to see if you’re qualified to make the monthly payments. This usually can take weeks while you wait for a pre-qualifying letter.

Pre-approval, on the other hand, takes it a step further and usually involves non-refundable fees. This process takes into consideration your credit history report, income verification, confirmation of down payment, and ability to pay closing costs. Once approved, the pre-approval letter lets the real estate agent and seller know you’re qualified to negotiate terms.

Why you should maintain a good FICO score

Derived from your credit history report, credit scores are based on points you receive for being a good borrower. The most common scoring system used for mortgage approvals is done by the Fair Issac Corporation? (FICO?), which accesses the three main credit reporting bureaus (Equifax, TransUnion, and Experian.)

Credit scores can range from a low of 300 points to a high of 850. People with average credit usually score around 620, good credit at 660, and excellent credit above 720.

Example

Someone with a credit score of 620 requesting a 30-year loan term for $215,000 may pay an APR of 7.60%. A score of 720 or higher would qualify you for a 6.00% APR (a difference of 1.60%) or a potential savings of $230 per month. Should your credit score fall below 620 then you’re in the sub-prime mortgage category and your mortgage rate could go as high as 8.53%.
How to get the best rate

A good strategy for securing the best rate would be to clean-up your credit report at least six months prior to applying for a mortgage loan. Maintaining a debt-to-income ratio of less than 36% could boost your score by as much as 10%. Lenders like to see a history of long-term credit and ability to pay off a loan over time. The goal of any loan applicant should be to make sure their credit report is as accurate and sound as possible.

The lender should be able to provide you with a solid estimate of your closing costs and monthly payments. After you’re approved, the lender will lock-in your rate for a specified period of time (usually 30 to 60 days).

? Copyright 2007, Informa Research Services, Inc. (“Informa”). While all attempts have been made to provide effective, verifiable information in this article, neither the author nor Informa assumes any responsibility for errors, inaccuracies, or omissions. You should always seek the guidance of a licensed professional before making any major financial decisions.