Pre-Qualified vs. Pre-Approved: What’s the Difference?

The terms pre-qualified and pre-approved are easily confused and sometimes used interchangeably. If you’re getting ready to go house hunting, you may be wondering what’s better: pre-qualification or pre-approval.

Although they sound very similar, pre-qualification and pre-approval play very different roles in the home loan process. When you’re shopping for a home, pre-qualification helps, but pre-approval gives you more certainty about your finances and more credibility with sellers.

What Is Mortgage Pre-Qualification?

Pre-qualification is less formal than mortgage pre-approval and requires less documentation. It tells you what you might be able to borrow, but not what they are willing to lend you.

To pre-qualify for a home loan, you provide the lender with your income, monthly debts, approximate credit score, and the amount you have saved for a down payment. No documentation is required to back up the numbers.

Within a few hours of your pre-qualification application, the lender will give you an estimated loan amount and monthly payment, a general interest rate range, and information on their loan products and home loan process.

Advantages of Pre-qualification

Although pre-approval is taken more seriously by sellers and their agents, there are some benefits to pre-qualification. Turn-around time is quick, usually no more than a few hours; you don’t need any documentation, and it gives you a sense of how much you might be able to afford. Because the lender doesn’t pull a credit report, pre-qualification does not affect your credit score. If you’re new to home buying, pre-qualification is a good starting point and shows you what you’ll need for the pre-approval process.

What Is Mortgage Pre-Approval?

Pre-approval is a more intensive process in which the lender makes a conditional commitment to lend you a certain amount of money. The conditional commitment also includes options to lock in an interest rate and conditions for final approval.

For a mortgage pre-approval, you have to provide supporting documents such as pay stubs, tax returns, and bank statements. The lender will conduct a formal credit check to get your credit score, a record of your outstanding debts, and details of your credit and repayment history. The lender will also perform a debt-to-income analysis. Finally, they will verify any information that you provide, such as your employment status and the assets you own.

At the end of the mortgage pre-approval process, you receive a letter showing your borrowing limit. You take that letter into the house-hunting process and subsequent negotiations.

Advantages of Mortgage Pre-approval

A mortgage loan pre-approval shows sellers and their agents that you’re serious about the home loan process and ready to purchase a home. Having a pre-approval in hand strengthens your bargaining position, especially if you’re in competition with buyers who aren’t pre-approved. In addition, being pre-approved makes the closing process go faster because you’re not starting your loan application from scratch.

Timeline for a Mortgage Pre-approval

Once the lender has your application and your documentation, a mortgage pre-approval takes anywhere between 7 and 10 business days. The offer is typically valid for 60 to 90 days.

Mortgage Pre-Approval Process

The pre-approval part of the home loan process is straightforward, but it’s helpful to be prepared in advance to avoid delays. Here are the typical steps:

1. Choosing a lender. Look for the right lender by comparing rates, fees, and online customer reviews. A short meeting can give you a sense of what it will be like to work with a particular lender and give them an opportunity to get to know you. You can get pre-approved through a bank, credit union, or online lender.
2. Completing an application and submitting documentation. Application forms are usually clear and easy to complete. If you don’t have the required documentation on hand, you can usually get it with a few phone calls or emails.
3. Getting a credit check. Your lender will handle this part of the process, but they have to get your approval for this in advance. Getting your consent for the credit check usually happens during the loan application process when you sign a document or check a box. It’s important to read the documentation carefully so you know what you’re agreeing to.
4. Receiving your mortgage pre-approval letter. If everything checks out, your lender will give you a letter stating how much you’re approved to borrow, which you can include when you make an offer on a home.

Pre-qualified Vs Pre-Approved: Which One Do You Need?

You can pre-qualify for a home loan very quickly, so it’s tempting to go house hunting right away. However, it’s better to use pre-qualification for estimating your budget and researching loan options.

Get a mortgage pre-approval if you’re actively house hunting and you want your offer to be competitive. Mortgage pre-approval is particularly important in competitive markets.

Final Mortgage Approval

Once you make an offer and it’s accepted, it’s time to move to the last part of the home loan process, your final mortgage approval. This proceeds in these steps:

1. Ordering the appraisal. The lender hires a licensed appraiser to confirm the home’s market value. Don’t worry about the lender putting out money for this; you get to pay for the appraisal along with your closing costs!
2. Re-verifying your documentation. It could be several months between your mortgage pre-approval and your closing date, so your lender will re-check your income, employment, assets, and credit to make sure nothing has changed.
3. Underwriting. A mortgage underwriter reviews your entire file to assess the lender’s risk and confirm that you meet their requirements. Once this step is completed, you’ll receive a “clear to close” from the lender.
4. Closing Day. On closing day, you sign the final paperwork, pay any closing costs (like the appraisal fee mentioned above), and receive the keys and access codes to your new home.

Pre-Qualified vs. Pre-Approved

The difference between being pre-qualified vs pre-approved is key to a successful house-hunting experience. Pre-qualification is an excellent first step, but once you get more serious, a mortgage pre-approval is a must. For more information or clarification, trust an experienced real estate agent to guide you.