The Difference Between Pre-Qualified and Pre-Approved
Pre-qualification acts as a dry run of the loan application process. The mortgage lender will use details you provide about your credit, income, assets and debts to arrive at an estimate of how much mortgage you can afford. The whole process may take only minutes or a few hours at most, and is free.
While a "pre-qual" is non-binding to the lender (because the information you provide has not been verified), it does serve as a good indication to potential sellers of your general creditworthiness.
In our current, competitive real estate market, sellers prefer buyers present an offer with a pre-approval letter. So, if you are serious about buying, this is the first step towards getting you in your new home.
The Pre-Approval Letter Reigns Supreme
Getting pre-approved is a step beyond pre-qualification, and it's much more involved. A pre-qualification is a good indication of credit-worthiness and the ability to borrow, but a pre-approval is the definitive word.
Typically, the pre-approval process is more thorough and formal. It may also take longer to complete than mortgage pre-qualification. Different lenders may have different requirements, but you should be prepared to present certain paperwork, including pay stubs, W2s, residential history, tax returns, and bank statements from the past two years. You’ll also likely be required to have a form of ID, like your driver’s license, as well as your Social Security number.
Get Pre-Approved: Keller Mortgage
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What is Private Mortgage Insurance?
If coming up with 20% as a down payment for your new home isn't a reality, that doesn't mean your dream of buying a new home is on hold.
Lenders may offer you the opportunity to finance your home with a lower down payment, but they will likely require you to carry Private Mortgage Insurance (PMI). Simply put, PMI protects a lender from borrower defaults. Your monthly PMI fee will be paid along with your mortgage, and increase your overall cost of homeownership.
The good news is that carrying PMI will not be required for the entire length of your mortgage. Once the value of your home has appreciated enough or you've paid enough against the principal value of your mortgage, your lender will allow you to cancel your PMI policy.