As a student going to BYU, I wanted to get into real estate, but my income while attending school was far from being sufficient to buy a home the conventional way by applying for a loan. So I had to wait until I graduated in 2011 and got a full-time job to be able to get serious about buying my first rental.
...Now, I realize there are other creative methods out there to buy a home, and I am constantly trying to learn more about these methods, but the one I understood the most when I graduated was to apply for a loan through a mortgage company. And that’s the road we took.
So in the process of applying for a loan and finding the right house to buy, we learned that we had to know the difference between Pre-Approval and Pre-Qualification.
Pre-Qualification: A verbal statement from your loan officer telling you how big of a loan you can qualify for based on how much debt you have and how much income you make. The loan officer will ask you for ALL of your monthly expenses, as well as how much money you bring in each month. The lower your debt/income ratio, the more you will “verbally” be approved for.
Pre-Approval: A physical statement from your loan officer saying how big of a loan you actually qualify for based on your actual debt and actual income determined from a credit check. The loan officer will ask you for your social security # and run a credit check. This way he will determine exactly how much of a house you can buy. The lower your debt/income ratio, the more you will “actually” be approved for.
This information was helpful for us to know when started searching for homes. I would say it's okay to just go with the Pre-Qualification in the beginning, but as you start to get more serious about finding the right home for you then you have to go through the Pre-Approval process. I was a little hesitant at first to go through the credit check, because this was my first time going through the whole home buying process, but to tell you the truth...it was pretty painless. It was also helpful for our realtor to know that we could "actually" be approved for a loan if we ended up finding a house we liked. The last thing a realtor wants to do is waste his or her time showing homes we can't buy.