Summary of this article
Pre-approval offers stronger credibility than pre-qualification
Documentation determines loan accuracy and reliability
Multiple pre-approvals help secure better loan terms
For most Indians, buying a home is one of the biggest financial decisions of their life. Most homebuyers typically start their homebuying process by zeroing on the location and a few probable choices that fit their budget in that location. However, lenders and real estate professionals say that understanding the financial options should be first criteria.
Understanding Home Loans
Two terms that homebuyers will hear in the early stages of the homebuying process are pre-qualified home loans and pre-approved home loans. Though they may sound similar, they are not the same. The confusion between the two can lead to disappointment, delays, or even losing out on the property you choose.
Difference Between Pre-Qualified Vs Pre-Approved Home Loans
Homeownership can be a tedious process if done without knowing the right approach. Here are the key differences between the two loan options.
Pre-qualification is an informal assessment of how much you might be able to borrow from the lenders. It is typically based on estimates, such as your income, debts, and credit score range. In this case, the lender does not run a hard background check on the potential borrowers. Due to this, the pre-qualification process is easier, but not accurate.
Says Prakhar Agrawal, director, Rama Group: “Pre-qualification is like an idea of how much money you can borrow. This is based on what you tell them about your income, the money you have, and what you owe.”
On the other hand, pre-approval is much more than a thorough process. It involves a detailed review of the financial situation of the borrower. This includes a thorough documentation and credit check.
When the borrower passes this check, he/she is marked as ‘pre-approved’, and the lenders are now willing to lend a specific loan amount at a particular rate of interest. This makes pre-approval apt for people who are looking for a faster home-buying process.
“Pre-approval is when they actually check your financial papers like your salary slips, bank statements, tax returns, credit history, and proof that you have a job or your own business,” adds Agrawal.
From the seller's point of view, having a buyer who is pre-approved for a loan is far more credible than one who is not.
What Documents Are Required For Each Type of Loan
The primary difference lies in the kind of documentation that is required for each.
For pre-qualification, the documentation required is nominal. Lenders just require the following,
Self-reported income
Approximate monthly debts
Estimated assets
Credit Score
For such pre-qualified loans, the lender does not run extensive background checks, and hence, this estimate is not accurate.
As far as pre-approved loans are concerned, the lender takes a closer look at the borrower’s finances and requires all the supporting documents. These include:
Proof of income
Employment verification
Bank statements
Asset documentation
Credit report authorisation
Debt information
These documents allow the lender to determine whether the applicant is reliable or not.
Can One Get Pre-Approved By Several Lenders
One of the most common mistakes people make is to get pre-approved by just one lender. One thing applicants tend to miss is that browsing through many lenders can get them better deals. It can help them compare loans and choose one with better rates of interest. This gives them better negotiating power, too. Borrowers also get to choose a different lender if they face delays in loan disbursal.
“When it comes to dealing with lenders, buyers can shop around and get pre-approved by more than one lender to see who offers the best deal. Buyers should think carefully about how they do this though. They should compare the rates of interest and the loan terms from lenders to find the one that works best for them and get pre-approvals from multiple lenders to see what their options are. This way buyers can make a decision about which loan is right for them and get the best loan terms possible,” adds Agrawal.
For buyers, it is vital to know what documentation leads to what kind of loan offers. At the end of the day, it is better to be pre-approved for a loan instead of being pre-qualified as a buyer. The more prepared you are, the stronger foothold you have in the home buying process.
