What is the Difference Between Pre-approval and Pre-qualification?

June 27th, 2018 | First-time Homebuyers, Purchasing a Home

When it comes to mortgages, there are two similar sounding terms that often confuse potential homebuyers: pre-qualification and pre-approval. While they are alike in some ways, their purposes are different. If you are looking to get a mortgage, here’s what you need to know about pre-qualification and pre-approval.

Pre-qualification

A home loan pre-qualification is an informal estimate of how much you can afford and how much a bank would be willing to lend you. It can take place on the phone, in person or even online. The lender will ask for relevant mortgage information, like income, assets, and debts. If your numbers add up, you will be pre-qualified for a mortgage loan, complete with a loan limit. While this is not a formal promise to lend you money, a pre-qualification can give you a rough idea of whether or not you are financially prepared to take on homeownership and how much you can afford to spend on a home purchase.

A pre-qualification can help you decide whether to explore homeownership. If you are preparing to make an offer, ask the lender what it needs to review for a pre-approval letter.

Pre-approval

A pre-approval is essentially the same process as a pre-qualification but with verifiable documentation. This time you will have to provide paystubs, bank account statements, W-2s and any other pertinent paperwork. The lender will also run a credit check. Based on all this information, the lender will offer you a pre-approval with a formal letter and a preliminary agreement to lend you mortgage funds up to a certain amount.

A pre-approval letter can show that a lender has reviewed information provided so far. It is preliminary and does not guarantee final funding.

Review times and any fees vary by lender. Ask how long the review usually takes and whether a credit check or other step has a fee.

It is important to know that a pre-approval is not a guarantee that you will be given a mortgage. Once you go under contract on a property, the lender’s underwriting process will examine your financial health even more carefully before signing off on the funding. For this reason, it is important to not make any major changes to your credit or debt load during the underwriting term.

In summary, if you are just curious to find out if you can afford a mortgage, get a quick pre-qualification. If you are serious about buying a home, though, go straight for the real deal - a pre-approval.

For questions about pre-qualification or pre-approval, contact us.