As you step into the mortgage lending world, there are many terms that can be confused with one another and even sound synonymous. Pre-qualification and pre-approval are a perfect example of this. Many people make the mistake of using the two interchangeably, but they are actually quite different.
Here’s what you need to know about the difference between pre-approval and pre-qualification and the purposes of each status as you apply for a mortgage.
What is pre-qualification?
Pre-qualification is usually the first step in the mortgage process, designed to provide a general estimate of how much money a lender might be willing to loan you. It’s a relatively simple, informal process that involves providing basic financial information, such as your income, debts, and assets, either online or over the phone. Our loan officers can do this without you submitting any supporting documentation or an in-depth look at your financial history.
Based on this preliminary information, we can give you an estimate of what you may qualify for in terms of a loan amount. While this can give you a rough idea of your buying power, it’s important to understand that pre-qualification is not a binding document, and the figure provided is not a guaranteed loan offer.
Briefly explained, pre-qualification:
- Is typically quick and easy, often done online or over the phone.
- Involves no official review of your financial documents or credit score.
- Provides a ballpark figure of what you may be able to borrow.
- Is not a binding commitment from the lender.
- Helps you get an initial sense of what price range you can explore.
What is pre-approval?
Pre-approval is a more thorough and formal process. When you apply for pre-approval, we take a detailed look at your financial background, including your credit score, tax returns, employment history, income, assets, and debts. This step involves submitting documentation such as pay stubs, bank statements, and tax returns and it a head start toward getting your loan funded.
Once the underwriters have reviewed and verified all this information, we can provide you with a pre-approval letter, which specifies the amount we are willing to lend you, subject to certain conditions such as the home’s appraisal. This pre-approval is based on a formal credit check, and the letter you receive is essentially a conditional offer of financing.
Here are some of the key features of pre-approval:
- It involves a formal application and credit check.
- It requires supporting financial documents such as tax returns, pay stubs, and bank statements.
- It gives you a specific loan amount that you’ve been conditionally approved for.
- It can significantly strengthen your position as a serious buyer in the eyes of sellers, far more than pre-qualification.
Which one do I need to pursue?
There are benefits to both pre-qualification and pre-approval. Deciding which one to pursue depends your unique situation.
If you are just beginning to explore the potential of owning a home and wonder how close you are to being ready, pre-qualification can be a simple step that allows you to get a more educated idea about what you can afford. Without going through the entire process of submitting documentation or having a hard inquiry run on your credit, you can get the numbers you need to decide whether now is the time to look for a home to buy.
If you’re more serious about buying a home soon, and you want to find out exactly what you can afford and begin making offers, then pre-approval is going to be the better fit. You’ll be able to submit the documents required to get an official pre-approval letter that you can use to strengthen your offers, providing confidence for both you and your sellers.
Want to learn more about applying for a loan? We can help, so contact us any time.
