What is the difference between being pre-qualified and pre-approved for a mortgage?
When you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval.” Both pre-qualified and pre-approved are terms commonly used in the context of applying for a loan, such as a mortgage. While they are often used interchangeably, they have slightly different meanings. Before beginning the co-buying journey, it is important to understand both terms.
What is mortgage prequalification?
Pre-qualification is typically an initial step in the loan application process. A lender collects and evaluates your basic financial information, such as income, debt, and credit score, to estimate how much you may be able to borrow to buy a home. Prequalification is usually a quick and informal process and does not involve a deep dive into your financial history or documentation. This means the intention is to give you a general idea of how much you’ll be approved for when it comes time for closing. This allows you to set a budget for home buying and narrow down how much you can spend on a home.
What is mortgage pre-approval?
Preapproval is the second step, or a conditional commitment to grant you a mortgage. Hence, pre-approval is a much more involved and formal process. You must complete an official mortgage application to get pre-approved, along with supplying the lender with all of the necessary documentation to perform an extensive credit and financial background check. A lender will request documentation from the borrower, such as pay stubs, tax returns, and bank statements, to verify your income, assets, and debts. The lender will also check the borrower's credit report and score. Based on this information, the lender will provide a more precise estimate of how much you can borrow and under what terms. When you go through the pre-approval process, you’ll also receive a better idea of the mortgage rate you’ll be charged. Some lenders will allow you to lock in an interest rate.
When the pre-approval process is complete, the lender will provide you with a conditional commitment in writing for an exact loan amount. Then you can look for homes at or below that price level. Being pre-approved will give you an advantage when working with sellers because you’re one step closer to getting a mortgage.
Check out the table below for a quick rundown of the difference between pre-qualification and pre-approval.
The bottom line
In essence, pre-qualification provides a rough idea of how much you may be able to borrow. Pre-approval provides a more accurate estimate, based on a detailed review of your financial situation. Pre-approval is usually a stronger indication of a lender's willingness to lend to you than pre-qualification. By getting approved early in your co-buying journey, you can focus on your dream home and stand out to sellers as a pre-approved buyer.
Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of the information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market. While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.
