What Is The Difference Between A Mortgage Pre-Qualification And A Pre-Approval?

When exploring mortgage options, you've probably seen "pre-qualified" and "pre-approved" mentioned. Both are essential steps in the home loan journey, but they have distinct differences.

Pre-Qualified vs. Pre-Approved: Understanding the Difference

For newcomers to the home-buying process, pre-qualification and pre-approval might appear similar, but pre-approval is more comprehensive. While both help you understand your buying power, pre-approval involves a detailed verification of your financial status, resulting in a more precise loan estimate.

A pre-approval letter signals to sellers that you are a serious buyer. “In the current market with limited housing inventory, buyers need to present themselves as strong contenders,” explains Tom Pessemier, mortgage broker with the Pessemier Team at Edge Home Finance.

Your First Step: Mortgage Pre-Qualification

Pre-qualification provides an approximate idea of how much you might be able to borrow. If you've been saving for a home, it gives you a general sense of your budget, helping you plan your down payment and closing costs.

The lender will ask for basic financial details, including your income and assets, and perform a "soft inquiry" on your credit, which doesn't affect your credit score.

You'll receive an estimated mortgage amount and a pre-qualification letter to show to sellers and real estate agents.

Benefits of Pre-Qualification

• Compare mortgage rates from different lenders.

• Set a realistic home-buying budget.

• Understand your buying power without impacting your credit score.

• Address any financial issues before seeking pre-approval.

• Be ready with a lender when making an offer.

Limitations of Pre-Qualification

Pre-qualification is useful for initial planning, but if you're ready to make an offer, pre-approval is crucial to move the process along quickly.

Your Next Step: Mortgage Pre-Approval

Pre-approval requires filling out a formal application and providing documents to verify your financial situation, such as identification, tax returns, and proof of income. The lender reviews these documents and performs a credit check to determine the loan amount and interest rate you qualify for. After verification, you receive a pre-approval letter indicating how much you can borrow and at what rate.

Pre-approval demonstrates to sellers that your financing is secured, making you a more attractive buyer in a competitive market.

Advantages of Pre-Approval

• Clearly understand what you can afford and the terms of your loan.

• Preferred by agents and sellers as it shows financial readiness.

• Accelerates the loan process since your information is already on file.

In summary, a pre-qualification is a great first step to help you get a general idea of the financing that you may be able to obtain for a home. A pre-approval takes that idea and makes it more concrete, and this can help to make you look more secure and attractive to potential home sellers. If you have been thinking about beginning your home search but are not sure where to start regarding financing, give our team a call! We work with a number of local lenders who can help you get both pre-qualified and pre-approved depending on where you are at in your journey. From there our team of experienced local real estate agents will help you find the perfect home within your budget. 

To learn more about pre-qualified vs pre-approved, take a look at this article from Homes.com.