First time home buyers need to get pre-approved before they start looking for a home to buy. More often than not they submit an online pre-approval application to a lender and they end up getting pre-qualified which is not the same as getting pre-approved. Let's take a close look at the difference between Pre-Qualified versus Pre-Approval.
Pre-Qualification-You submit an application and the loan officer runs your credit and reviews the information you provided to him. He may collect one or 2 pay stubs to verify income or he just may take your word on how much you make on your job. Also, he may not submit your loan to underwriting for approval and he just makes an assessment of your financial situation and he "feels confident" that you are qualified for the loan program.
There could be some major issues is doing a pre-qualification. (1) You may not qualify for a house in the price range you want if your income is not fully verified with pay stubs, W2 forms, and tax returns in conjunction with complete 2 year work/education history. (2) Loan could be denied later if your application is not submitted to underwriting during pre-qualification stage. The loan officer's determination whether your qualify for a program could be incorrect.
So what does this mean? You may start house hunting, find the perfect home, start processing your mortgage paperwork, pay $600-$700 for appraisal and home inspection, and then find out 2-3 weeks later that your loan is not approved because the loan officer mis-calculated your income by a few hundred dollars per month. Now, you can't buy the home you want and you are crushed.
Pre-Approval-You submit an application and the loan officer collects last 2 pay stubs, W2 forms, and tax returns to verify your income. Furthermore, he looks at your employment history and type of income to properly calculate your monthly income used to qualify for the loan program. Next, he submits your loan to undewriting with credit report and scores to get approval. Finally, you will receive a pre-approval letter stating you are pre-approved to buy a home in your maximum price range.