As you prepare to purchase a new home, you’ll hear the terms “pre-qualified” and “pre-approved.” These are key steps in the mortgage application process. However, there are important differences in the two terms that every homebuyer needs to understand.
Briefly, being pre-qualified is a first step in the mortgage process that gives you an idea of how large a loan you may be qualified to receive from a lender. Pre-approved is a conditional commitment from a lender to grant you a mortgage for a pre-determined amount of money. However, neither being pre-qualified nor a pre-approval letter is a guarantee that a lender will actually grant you a loan.
Let’s take a closer look at the similarities and differences between the two terms.
Similarities of Pre-Qualified and Pre-Approved
Mortgage pre-qualification and pre-approval have many similarities when purchasing a home:
- Both provide an estimate of the loan amount for which you most likely will qualify.
- Both indicate to sellers that you’re a serious contender when submitting an offer for a home you want to buy.
- Both help demonstrate that you have a good chance of closing on a mortgage.
- Both will help your offer stand out to sellers who do not require a pre-qualification or pre-approval letter.
It is important to know that you are not obligated to obtain a mortgage from the lender who pre-qualifies or pre-approves you.
Differences Between Pre-Qualified and Pre-Approved
According to the Consumer Finance Protection Bureau, there is often not much difference between pre-qualification and pre-approval. Some lenders use the terms interchangeably, and some lenders might have different definitions for each. But, in general, here’s how the two may differ.
- Pre-qualification is often seen as the first step in the mortgage process, followed by pre-approval.
- For pre-qualification, you supply an overview of your financial history to the lender, including income, assets, debts, and credit score. You are not always required to document your financial history. Pre-approval is similar but typically requires that you provide documentation verifying your income, assets, and debts.
- Pre-approval often requires a credit check, resulting in a hard inquiry on your credit report.
What Does it Mean to be Pre-Qualified?
Being pre-qualified implies a lender has decided you will most likely be approved for a loan up to a certain amount based on your current financial situation. However, pre-qualification does not guarantee you will be approved for that amount. The benefits of pre-qualification include:
- There is no impact on your credit score.
- There are typically no fees.
- It helps you estimate how much home you can afford.
Although pre-qualification is a good first step, some sellers won’t take you seriously until you’ve been pre-approved.
What Does it Mean to be Pre-Approved?
Being pre-approved means a lender has actually approved you for a specific loan amount. The benefits of pre-approval include:
- There are typically no fees.
- You now have negotiation power with a seller.
- It helps you know exactly how much home you can afford.
- It speeds up the closing process.
Also, being pre-approved is a good way to spot and correct any potential credit issues.
Pre-approval does not guarantee that you will receive a home loan. Once you have a contract on a home, you must complete the process to finalize qualifying for a mortgage with the exact home you wish to purchase.
Pre-qualified and pre-approved are important in showing a seller that you are a serious buyer. Since the terms “mortgage pre-qualification” and “mortgage pre-approval” are often used interchangeably by lenders, dive into the details with your lender to see exactly what is meant by the terms.