The next level of preparation is to get “pre-qualified.” Pre-qualification is an informal and highly simplified version of the qualification process you go through after you apply for a loan. Basically, the loan officer will apply the standard qualifying ratios to your income and debt level and determine how much loan you would qualify for if you were applying for a loan. Pre-qualification assumes that all the other things that go into the loan approval decision are acceptable. It does not indicate that you have any leg up in the loan application process. In fact, your real estate agent can probably pre­qualify you. If you follow the process outlined in Key 8 and know how to calculate mortgage payments, you can pre-qualify yourself!

The purpose of pre-qualification is to get an idea of how much house you can afford. If you know how big a loan you could qualify for and how much cash you can invest, you can add the two totals to determine the most expensive house you can consider This information can be valuable as you search the market (unless you are looking for a dream home that will likely remain a dream).

Pre-approval is more serious. With pre-approval, the lender goes through the entire loan approval process as if you were applying for the largest loan you can get. The purpose is to set a limit on your house search (as in pre-qualification) and show you are creditworthy at that level. The process must be performed by a lender (or someone authorized by the lender to process loan appli­cations) and will probably require some type of fee (to compensate for the cost of a credit report and processing time). More importantly, you will need to decide on the lender and type of loan you plan to use to finance your eventual purchase. This is because pre-approval applies only to a specific loan offered by a specific lender. If you choose another lender or loan later on, your pre-approval will not apply.

While pre-approval shortens the loan processing time once the loan application is submitted, the real value is in the negotiating power it can provide in competitive markets. A home seller might favor a buyer with a definite chance of getting funding, this can translate into a better price or other concessions. It could prove decisive if you are a first-time buyer or if you need to make a minimal down payment.

If you have any question on how far your income will go in the current housing market, you should get Pre-qualified. There is no need to waste time on homes you cannot afford. If you have any doubts about your ability to get a loan (perhaps you have had some credit problems in your past), you might find it worthwhile to get pre-approved. Or, you may want to defer that decision until you test out the market and can better judge whether pre-approval will be useful.