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Q. Is there a difference between being pre-qualified for a home loan and being pre-approved for a home loan?

A. Yes, there is a difference between being pre-qualified and pre-approved. A pre-qualification occurs when a loan officer asks you questions about your income and debts, and gives you a quick estimate of the loan amount you might qualify for. You could find mortgage calculators online that would give you this same information.

Being pre-approved, or getting a credit approval, means you actually completed the loan application process. The information you provided a lender – about your income, debts and credit – was verified and submitted to an underwriter for a decision.

If you are considering buying a home, you should get pre-approved before you start looking for a home. When you find the home of your dreams, be sure you know you’ll be approved for a loan to buy it.

When you go to a lender for a pre-approval, you’ll need to take documentation with you. The more information you have with you, the smoother the process will go. You should take the following when you meet with a lender:

  • Pay stubs for one month
  • W-2s for the past two years
  • Tax returns for the past two years
  • Bank statements for the past two months
  • A list of your current monthly bills, including account numbers, balances due and minimum monthly payments

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The lender may ask for additional documentation depending on your particular situation.

The lender will tell you how much of a loan you are approved for. Now, you need to do some math on your own. You need to determine whether a house payment for that loan amount fits your budget. For example, suppose you are approved for a $200,000 loan. Can you afford the payments for a loan of that amount? When you estimate what your monthly loan payment will be, make sure that you include the principle, interest, taxes and insurance.

Consider, too, other expenses you have that will affect the amount you can afford to spend each month on a loan payment. There are things you may budget for that your lender won’t know or care about when he approves you for a loan. For example, perhaps you have a health condition that requires you to eat a special diet and take costly medication. It’s your job to make sure the loan payment will fit into your budget.

If you are pre-approved, and then something changes that affects your finances, the amount you are pre-approved to borrow will change, too. For example, if your marital status or income changes, that will affect the amount of money you are pre-approved for. If you take out another loan, such as a car loan, before you buy a house, that too will affect the amount you can be pre-approved for.

When you find a house that fits your budget and the amount you are approved for, you are ready to buy a home. Be sure to buy a home that comes with a monthly payment you’re comfortable with and able to pay each month.

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Bonnie Spain is the executive director of Consumer Credit Counseling Service of the Black Hills, a United Way member agency. For more information, email credit@cccsbh.com.

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