Pre-qualification and pre-approval are two terms often thrown around in the home mortgage world. You may have even been told you need one by your real estate agent.
What do they mean, though? And are they interchangeable? More importantly, how do you get one?
Let’s take a look at pre-qualified vs. pre-approved now.
The goal of pre-qualification and pre-approval
Pre-qualification and pre-approval are steps in the mortgage process, and with each, the lender aims to evaluate your qualifications for a loan. This might mean looking at your income, credit score, or other financial details.
Once you’ve been pre-qualified or pre-approved, you’ll often get a letter stating so. It will also contain an estimate as to how much you can qualify to borrow, as well as the type of loan program you’ll be using.
A mortgage pre-qualification or pre-approval letter can serve as a helpful tool in both budgeting for and guiding your home search. Depending on which kind you have, it might also help you stand out from other buyers in a bidding war.
Where mortgage pre-approval and mortgage pre-qualification differ
To start, it’s important to note that some lenders use "pre-approved" and "pre-qualified" interchangeably. Some may also offer one and not the other, so it’s important to talk to your mortgage company about their exact processes and terminology before diving in too deep.
Generally speaking, though, a mortgage pre-qualification is less precise than a pre-approval. It’s typically based on information you, the borrower, provide -- a rough estimate of your credit score and your income, usually. Then, the lender takes this information, applies it against their loan requirements, and determines if you qualify and for how much.
Pre-approvals, on the other hand, involve verification. The lender will actually pull your credit to see your score and payment history, and they will request documents like pay stubs, W-2s, and tax returns, too. This allows them to more accurately assess your qualifications and the loan payment you could presumably cover.
To sum it up, here are the main differences between pre-approved and pre-qualified.
- Based on self-reported information.
- Takes only a few minutes.
- Requires no documentation.
- Provides a rough estimate of what you can afford.
- Based on a credit report and lender-verified information.
- Requires documentation.
- Involves a lengthier loan application.
- Accurately depicts what you can afford.
Neither a pre-qualification nor a pre-approval guarantees you’ll qualify for and close on a home loan. They’re simply acknowledgments that you appear to be a good candidate for a mortgage loan of a certain size.
Which one should you get?
If you want the most accurate depiction of what you can qualify for, or you’re about to start searching for a property, a mortgage pre-approval letter is going to be your best bet.
Since pre-approvals require documentation, they’re typically a better indicator of whether you’ll qualify for a home loan or not. For this reason, a pre-approval letter usually holds more weight than a pre-qualification letter does, at least with sellers.
It’s true: Getting pre-approved could actually help you stand out from other buyers. If faced with multiple offers, sellers will often choose a pre-approved buyer over other options on the table, as it indicates they’re more likely to be approved for financing (and ultimately follow through with the deal).
A pre-qualification is usually only worthwhile if you’re far out from the home search and are just getting an idea of what mortgage options you may have.