One of the very first steps a home buyer should take, before choosing a real estate agent (preferably an exclusive buyer’s agent from an exclusive buyer’s agency) and prior to the home search, is getting mortgage pre-qualified or pre-approved.  This will give you an idea of the amount of financing a lender will provide based on your credit, income, and other requirements.  However, these terms are often used interchangeably.  What’s the difference?

A mortgage pre-qualification is the quickest and easiest way of getting a general idea of how much a lender may offer to lend you.   The lender will usually run a credit report, and then issue a written certificate based on verbal [undocumented] information, including your income and employment status.  A pre-qualification is usually provided at no cost to the potential borrower.   Pre-qualification letters are less meaningful than a pre-approval.   Many listing agents will require a mortgage pre-approval with an offer to purchase, but will frown upon receiving a mortgage pre-qualification.

Note:  A pre-qualification or pre-approval are not a guarantee or commitment to provide financing.  Only a formal unconditional loan commitment may be considered a firm approval to provide financing.

A mortgage pre-approval requires written documentation and verification of income, assets, credit, and employment.  A pre-approval requires completing a formal loan application, and an application fee is typically charged.  A pre-approval is much more reliable as a written indication of how much financing a lender may provide.  A Good Faith Estimate should be received by the borrower within 3 days of the loan application, which will give a borrower an idea of estimated closing costs, based on an estimated sales price and property taxes.

Ask the mortgage officer how much the monthly PITI payment will be based on the loan amount requested.  PITI is mortgage principal and interest, taxes, and homeowner’s insurance.  Is this figure within your budget, or is it more than what you can comfortably afford?  If it is too high, consider a lower price range, a more affordable area, or a different type of housing (ex.:  condo or co-op).