Pre-Qualification vs. Pre-Approval: What California Home Buyers Should Know

If you’ve been researching the home buying process, you’ve probably encountered the terms pre-qualification and pre-approval. But you might not know exactly what they mean or how they apply to you.

This guide explains how mortgage pre-qualification and pre-approval work in California, how they differ, and why it’s generally better to get pre-approved for a loan.

1. Pre-qualification gives a rough estimate of how much you might be able to borrow, based on self-reported income and debt. It usually doesn’t include a credit check.
2. Pre-approval involves a full review of your finances, including a credit check and documentation. It provides a more accurate loan amount for house hunting.
3. Pre-approval is better for serious buyers because it helps narrow your home search and strengthens your offer with a pre-approval letter.
4. Pre-qualification is helpful early on if you just want a general idea of what you can afford but aren’t ready to house hunt.
5. After pre-approval, you can start working with an agent, make offers, and move toward final loan approval and closing.

Pre-Qualification: An Estimated Price Range

The mortgage pre-qualification process gives you an estimated range for financing purposes.

You provide the bank or lender with some basic information about your household income and debts, and then receive a maximum loan amount or range.

California home buyers can often get pre-qualified online, just by submitting a form with income and debt information. In most cases, borrowers can complete the pre-qualification process without a credit check.

A home buyer might want to get pre-qualified just to get a rough estimate for planning purposes.

But the pre-qualification process usually doesn’t include a credit check or debt-to-income analysis. So it’s not particularly useful when it comes to house-hunting purposes, making an offer, etc.

If you’re actually ready to enter the housing market, a mortgage pre-approval would be more useful.

Pre-Approval: A More Thorough Review Process

Mortgage pre-approval is a more thorough version of pre-qualification. California home buyers can get pre-approved for a loan when they’re ready to start shopping for a house.

Pre-approval typically involves a credit check and a more in-depth review of the borrower’s income, assets, and debts. The goal here is to get a better sense of how much you can borrow, so you can narrow your home search accordingly.

In fact, mortgage pre-approval is the closest you can get to the final loan approval and funding without having a signed purchase agreement in hand.

You’ll probably need to submit a mortgage application to get pre-approved. That’s another thing that distinguishes it from the pre-qualification process.

A home buyer in California could get pre-qualified without having to submit a loan application. But an application is usually required for a full pre-approval.

The benefits of getting pre-approved include:

• It gives you a more accurate picture of your borrowing capacity, based on a thorough review.
• It helps you focus your housing search to a specific price range, saving time and energy.
• Pre-approval can also increase your chances of getting your offer accepted.

Which Process Makes Sense for You?

Have you reached the point where you’re ready to get a real estate agent and start house hunting?

If so, a pre-approval is the next logical step.

Getting pre-approved prepares you for the home search by establishing a specific price range. It can prevent you from wasting time looking at houses that exceed your budget and loan amount.

You’ll also receive a pre-approval letter, which you can submit to the seller along with your purchase offer. This shows the seller that you’re serious about (and capable of) buying their home.

A purchase offer that has a pre-approval letter attached usually has a better chance of getting accepted, when compared to a borrower who has not been pre-approved.

On the other hand, if you simply want an estimated mortgage amount based on your income and debts, mortgage pre-qualification might suffice. Just know that it won’t prepare you for house hunting the way a pre-approval would.

What Happens After You Get Pre-Approved

So, you’ve decided you’re ready to start shopping for a house, and you’ve received a pre-approval letter from the lender.

What happens now? What are the next steps in your path to homeownership?

At this point, you’re ready to enter the real estate market and start looking at homes. You can also choose a California real estate agent to work with, or navigate the process on your own.

The rest of the process usually looks like this:

1. You find a house you want to buy and make a purchase offer.
2. You negotiate with the seller, as needed, to find common ground.
3. You and the seller sign the purchase agreement / contract.
4. You provide your lender with a copy of the signed agreement.
5. Your loan goes through the underwriting process and then closing.
6. You receive the keys to your new house!

5 Things You Can Do to Prepare

If you’re planning to buy a home in California in the near future, you can take some proactive steps in the meantime. Here are some things you can do now that might help you later on, when it’s time to get pre-approved.

1. Check Your Credit Score and Reports

Your creditworthiness is a major factor lenders consider. Obtain your free credit reports from AnnualCreditReport.com and review them carefully for any errors. If you find mistakes, dispute them to get them corrected.

If you discover that you have a low credit score, seek ways to improve it. This might include paying down high credit card balances and making all payments on time going forward.

2. Assess and Organize Your Finances

Try to get a clear picture of your income, savings, and existing debts. Know your total monthly income (before taxes) and list all your recurring monthly debt payments (credit cards, car loans, student loans, etc.). Also, figure out how much you might need to save for a down payment, and start saving ASAP.

3. Create a Realistic Home-Buying Budget

Pre-approval tells you how much a lender might lend you. But only you can decide what monthly housing payment you’re comfortable taking on.

Consider all the costs of homeownership, including the mortgage principal and interest, property taxes, homeowners insurance, potential private mortgage insurance (PMI), and estimated costs for utilities and maintenance.

Use online calculators to estimate these costs based on potential home prices and interest rates, and determine a price range that fits your overall financial goals and spending habits.

4. Gather Important Financial Documents

Lenders will require documentation to verify the information on your application. Start collecting and organizing these documents now. Common items include recent pay stubs, bank statements, W-2 forms and tax returns for the past two years, and 1099 forms for self-employed home buyers.

5. Reduce Your Existing Debt (if Necessary)

Your debt-to-income ratio (DTI) is a key metric for lenders. It’s calculated by dividing your total monthly debt payments (including the estimated future mortgage payment) by your gross monthly income. A lower DTI indicates to lenders that you have more income available to cover a mortgage payment.