Finding a mortgage became easier when the Consumer Financial Protection Bureau began mandating that lenders provide a new, simplified disclosure form to help consumers compare home loans, but the process is still no walk in the park! Before you offer on a home, a seller will want to have certain guarantees that you are qualified to receive a loan and close on the deal. To better your positioning in an offer and avoid miscommunication snarls, you will have to understand the differences between lender evaluations of your creditworthiness. There are three main types of guarantees a bank or mortgage broker will provide, and they each require different up-front evaluation on their part and strength in the market on your part: the pre-qualification, the pre-approval, and underwritten approval. If you're buying in Boston, Brookline, or Newton you're going to want to know what each of these entail.
A pre-qualification is really just to get you started, so you have a ballpark idea of how big a mortgage you can afford. For a lender to pre-qualify you, they may ask for your employer's name and your Social Security number to verify your income and credit score. When a bank prequalifies you, it's giving you a preliminary statement of how much you could borrow, based on income and asset information you've provided. It is not based on any hard evidence, because at this point, you haven't given your bank statements or had bank officers request your credit report. It’s super basic and is not good for much in the Boston, Brookline, or Newton markets, but will help you wrap your head around what properties to start looking at online if you’re just browsing.
A bank will issue a mortgage pre-approval once it has all your documents in hand. These could include income verification from employers, recent tax returns, bank and brokerage statements, and credit reports. That assessment will result in a pre-approval letter from the lender that you can present when you bid for a home. Having a pre-approval in hand gives you a jump on other potential buyers. It lets the seller know you're a good candidate, and that the bank is likely to award you a loan. It'll also make you feel more prepared to buy. This is the most common document provided to buyers by lenders. Keep in mind that you're not required to borrow from the bank that issues your pre-qualification or pre-approval.
This is the most powerful type of qualification you can have as a buyer, and it even allows you to waive your mortgage contingency with more confidence (please consult your lender, agent, and lawyer if that is the right move for you in any given situation). Once the bank has all of your information, they will have a specialist call an underwriter to determine how much you're capable of paying and how big a mortgage loan you can afford. This will take into account the city you intend to buy in, and even calculate taxes and other expenses (like condo fee) liberally to give you an approval with full confidence in its legitimacy. The home still needs to appraise at your offer value (especially if you have a lower down payment or cash reserve), but otherwise you are the next best thing to a cash buyer. With an underwritten approval, your realtor can make offer and contingency timelines incredibly tight--which just might be the thing that helps you edge out other buyers.