Buying a Home: Get Pre-Approved or Pre-Qualified?

Pre-qualified and pre-approved sound the same, and both can show a home seller that you’re a good candidate for a mortgage. However, a pre-qualification is much weaker, and in today’s market it probably makes sense to go to the extra trouble for a pre-approval.

Though loan rates are low, many buyers are having trouble getting mortgages because lenders have tightened standards due to the financial crisis. That makes sellers nervous. No seller wants to accept a buyer’s offer and stop showing the home only to wait six weeks to find the buyer is denied a loan.

So getting a pre-approval could make the difference between getting your purchase offer accepted or rejected. Some sellers will select an offer accompanied by a pre-approval even if another buyer without one has offered a bit more.

A pre-qualification is a simple calculation of the maximum loan you can get based on your income and debts. Most lenders will provide this for free, and a pre-qualification may give the seller a bit of reassurance — but only a bit, as the lender doesn’t verify the data you provide.

You can perform the same calculation yourself with the Maximum Mortgage Calculator. It assumes that your monthly payment for principal, interest, taxes and insurance (PITI) cannot come to more than 28% of your gross income, while PITI plus your other debt payments cannot exceed 36% of income. Some lenders will allow debt obligations to be a bit greater, but not much.

A pre-approval is a much more extensive process in which the lender looks at more factors and verifies much of the information you provide. Wells Fargo (Stock Quote: WFC), for instance, asks for a previous address if the applicant has not lived in the current one for more than two years, as well as the name and address of your present employer, or a previous one if you haven’t had the current job for more than two years.

The pre-approval application also asks for all income sources, including things such as alimony and child support. It requires details on bank accounts, investments, retirement accounts and other assets. And it inquires about living expenses and debt obligations, as well as the market value of your current residence.

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