The home buying process comes with its own list of vocabulary you’ll need to learn. Among those new words and phrases: pre-qualified and pre-approved. Sometimes you’ll hear these terms used interchangeably, but there are important differences between them that you’ll need to know when it comes to buying a home.
What Does Pre-Qualified Mean?
Think of pre-qualification as step one, like dipping your toe in the mortgage-securing process. You provide your lender with a broad view of your financial situation, and they’ll be able to offer a rough estimate of the loan amount for which you’ll qualify. It’s also an opportunity to discuss your mortgage options, goals, and needs with a mortgage expert.
To be clear: pre-qualification is not a guarantee of a loan. It just gives you an idea of the loan amount you’ll likely qualify for. So, it doesn’t carry as much weight as pre-approval, but it can help when putting in an offer.
Because pre-qualification isn’t a firm offer or guarantee of a loan, you’re not obligated to use the lender for your mortgage loan; you’re still able to shop around for other home lenders even after you’ve been pre-qualified.
Pre-Qualification Letter
After you’re pre-qualified, the lender may provide you with a pre-qualification letter. It outlines the tentative loan amount they’ve offered you. While this is subject to change with pre-approval, a pre-qualification letter shows sellers you’re serious about buying a new home and are working with a lender. It’s a good first step, though it won’t carry as much weight as a pre-approval letter.
How long does pre-qualification take?
Pre-qualification is a quick and easy process. Once you’ve gathered your financial information, you can submit that info online and get pre-qualified that day.
What do I need to provide for pre-qualification?
With pre-qualification, all of your information is consumer-submitted, meaning you’re providing the lender with the data, including:
- Information about your debt, income, and assets
- Basic information about your bank accounts
- A soft credit check
- How much money you plan to use as a down payment
- Desired mortgage loan amount
What Does Pre-Approved mean?
Getting pre-approved for a mortgage is step two, and it’s more like jumping headfirst into the mortgage waters. The pre-approval process is far more involved. You’ll need to submit a mortgage application. Your lender will perform an extensive credit and background check to ensure your financial information checks out and you’re ready for this loan. The lender will give you a detailed evaluation of the mortgage loan for which you’ve qualified, including an estimate of the interest rate you’ll be charged.
Pre-Approval Letter
Once you’re pre-approved, your lender will also give you a pre-approval letter. It outlines the exact loan amount you’ve qualified for, as well as an interest estimate. This letter is usually valid for 60-120 days, during which time you’re free to go house-hunting and submit offers. Backed by a lender, any offers you submit will be taken seriously.
How long does pre-approval take?
Because your lender will have to review your financial history in-depth, the pre-approval process can take five to ten days.
What do I need to provide for pre-approval?
Pre-approval requires a bit more work on your end as well as your lender’s, and you’ll need to provide extensive information, including:
- Detailed income information, including copies of pay stubs from the past 30 days
- Full credit check
- Bank account information or your two most recent bank statements
- How much money you plan to use as a down payment
- Desired mortgage loan amount
- W-2 statements
- Personal [and, if applicable, business] tax returns from the previous two years
Ready to House Hunt?
Pre-qualification and pre-approval provide you with an estimate of your mortgage loan, helping you outline your budget so you don’t waste time looking at houses that are too expensive.
Getting pre-approved also increases the odds of your offer being accepted in a competitive market [pre-approval shows the seller that you’re serious]. It also speeds up the mortgage process once your offer is accepted.
Pre-qualification is a faster process that requires much less paperwork, plus it’s almost always free and doesn’t impact your credit score. While pre-approval requires more time and effort and sometimes carries a fee, it’s more specific [in terms of both loan amount and interest] and has more weight when you make an offer.
When it’s time to seriously consider properties, you’ll need to be either pre-qualified or pre-approved for a mortgage loan.
Opinions expressed are solely my own and do not express the views of my employer.
*Pre-approvals are given to clients who have met qualifying approval criteria, and specific loan requirements, at the time of applications. Results may vary.