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What is the difference between being Pre-Approved vs. Pre-Qualified
A breakdown to help you understand the important differences
What is the difference between getting Pre-Approved vs. Pre-Qualified? A pre-qualification is a good indication of creditworthiness and the ability to borrow, but a pre-approval is your verified data—for example, a credit check; it is the definitive word and is much more involved.
Most real estate buyers have heard that they need to be pre-qualified or pre-approved for a mortgage (your home loan) if they’re looking to buy a property. These are two key steps in the mortgage application process. Some people use the terms interchangeably, but there are important differences that every homebuyer should understand.
Pre-qualifying is just the first step. It gives you an idea of how large a loan you’ll likely qualify for. Pre-approval is the second step, a conditional commitment to actually grant you the mortgage.
Key Takeaways
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Pre-qualification is based on data the borrower submits to a lender, which will provide a ballpark estimate of how much they can borrow.
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The pre-qualified amount isn’t a sure thing, because it’s based only on information provided.
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The lender won’t take a close look at a borrower’s financial situation and history to determine how much mortgage they can reasonably afford until they reach the pre-approval stage.
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The borrower receives a conditional commitment in writing for an exact loan amount after they’ve been pre-approved.
Pre-Qualified
Getting pre-qualified involves supplying a bank or lender with their overall financial picture, including debt, income, and assets. The lender reviews everything and gives an estimate of how much the borrower can expect to receive. Pre-qualification can be done over the phone or online, and there’s usually no cost involved.
Pre-qualification is quick, usually taking just one to three days to get a pre-qualification letter. Keep in mind that loan pre-qualification does not include an analysis of credit reports or an in-depth look at the borrower’s ability to purchase a home.
The initial pre-qualification step allows for the discussions of any goals or needs regarding a mortgage. The lender will explain various mortgage options and recommend the type that might be best suited.
Again, the pre-qualified amount isn’t a sure thing, because it’s based only on the information provided. It’s just the amount the borrower might expect to get. A pre-qualified buyer doesn’t carry the same weight as a pre-approved buyer, who has been more thoroughly investigated.
Pre-Approved
Getting pre-approved is the next step, and it’s much more involved. “A pre-qualification is a good indication of creditworthiness and the ability to borrow, but a pre-approval is the definitive word,” says Kaderabek.
The borrower must complete an official mortgage application to get pre-approved, as well as supply the lender with all the necessary documentation to perform an extensive credit and financial background check. The lender will then offer pre-approval up to a specified amount.
Going through the pre-approval process also offers a better idea of the interest rate to be charged. Some lenders allow borrowers to lock in an interest rate or charge an application fee for pre-approval, which can amount to several hundred dollars.
Lenders will provide a conditional commitment in writing for an exact loan amount, allowing borrowers to look for homes at or below that price level. This puts borrowers at an advantage when dealing with a seller because they’re one step closer to getting an actual mortgage.
Keep in mind that you don’t have to shop at the top of your price range. Depending on the market, you might be able to get into a home you like for less money than you’re approved for, leaving you with extra cash each month to set aside for home repairs, retirement, kids’ college funds, or checking something off your bucket list.
Key Differences
Below is a quick rundown of how pre-qualification and pre-approval differ.
Pre-Qualified = Pre-Q | Pre-Approved = Pre-A
Do I need to fill out a mortgage application?⠀⠀⠀
Pre-Q: No | Pre-A: Yes
Do I have to pay an application fee?
Pre-Q: No | Pre-A: Maybe
Does it require a credit history check?
Pre-Q: No | Pre-A: Yes
Is it based on a review of my finances?
Pre-Q: No | Pre-A: Yes
Does it require an estimate of my down payment amount?
Pre-Q: No | Pre-A: Yes
Will the lender give me a specific loan amount?⠀
Pre-Q: No | Pre-A: Yes
Will the lender give me interest rate information?
Pre-Q: No | Pre-A: Yes
Take Away:
Be sure you’re Pre-Approved by your lender before touring properties and falling in love with a home otherwise your offer will probably not be considered at all!
If you need a list of great lenders in our area please ask me for my favorites that I have had a excellent experience working with in the past.
