What is the difference between pre-qualification and pre-approval? What type of mortgage loan should I apply for? How can I work with a lender to get the best interest rate?
As a first-time homebuyer, you may be overwhelmed by the home loan process – and by all the terms that you encounter as you work to secure mortgage approval.
By familiarizing yourself with industry lingo, and the ins and outs of getting a mortgage, you’ll gain confidence and can even stand out from the crowd of buyers who are competing over today’s limited inventory of homes.
First, let’s discuss the difference between two important terms: mortgage pre-qualification vs. pre-approval. These are the two most common preliminary steps in applying for a home mortgage loan, but they each have different requirements and unique benefits.
Pre-approval vs. pre-qualification at a glance
Main differences between getting pre-qualified and pre-approved
A pre-qualification is a rough estimate of what you might be able to borrow for your mortgage. Pre-qualification is based on your “best guess” of information, which hasn’t been verified by the lender.
In contrast, mortgage pre-approval is the most comprehensive step a buyer can take toward attaining a home mortgage. To get pre-approved for a mortgage, the buyer will submit an official mortgage application and document their financial history for their lender. Once the lender verifies the information, they will offer a pre-approval letter to the buyer, stating that the buyer is “pre-approved” for a mortgage loan of a certain amount, with specific terms.
Key similarities between pre-qualification and pre-approval
Pre-qualification and pre-approval both help you determine your search parameters and the amount of money you will likely be able to borrow for a mortgage. However, sellers tend to take pre-approved buyers more seriously than pre-qualified buyers, because only pre-approved buyers have been truly vetted by a lender.
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What does pre-qualified mean?
Pre-qualification can be the first step in the mortgage process. In a pre-qualification, buyers can provide their own financial information, and the lender returns a general evaluation of the loan amount that the buyer can likely secure. Most lenders provide pre-qualifications for free, and they can be completed in a short time over the phone or online.
The pre-qualification amount is mainly for the buyer’s personal reference. Because the buyer’s finances were self-reported and not evaluated directly by a lender, a pre-qualification shouldn’t be submitted to a home seller as evidence of a buyer’s creditworthiness.
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Primary benefits of being pre-qualified for a mortgage
The benefits of pre-qualification are for the buyers. A pre-qualification:
- Can be the first step in the house-hunting process.
- Can help establish a preliminary home buying budget.
What documents do I need to provide?
Pre-qualification typically requires only a handful of documents*, including:
- Annual income and accrued debt
- List of assets and bank account information
- Desired mortgage amount
- Intended down payment amount
*Additional information may be required.
What does pre-approval mean?
The second step towards obtaining a mortgage, pre-approval, is a much more involved and thorough process. Here, the buyer turns in an official mortgage application and provides the lender with an extensive financial history. In return, the lender provides a more specific intended loan amount as well as the estimated interest rate the buyer can expect (assuming rates hold).
In short, a home loan pre-approval can offer the borrower peace of mind as they determine their budget and buying power. And because sellers and their agents recognize the effort it takes to get pre-approved for a mortgage, they may take buyers with a pre-approval letter more seriously. In a multiple-offer scenario, sellers and their agents may not even consider an offer that doesn’t come with a pre-approval letter.
Advantages of pre-approval
The benefits of pre-approval can be for both the buyer and the seller. A pre-approval:
- Can be the first step in the home purchase process.
- Provides the buyer with an estimate of their likely budget and buying power.
- May provide an estimated interest rate, should current rates hold.
- Can help buyers stand out in a competitive market.
- Demonstrates that a buyer is serious and ready to move quickly.
What documents do I need to provide?
Pre-approval requires official documents, including your:
- Driver’s license
- Social security number
- Last two tax returns
- W-2 statements for the last two years
- Recent pay stubs
- Clear records of any other income sources
- Employer contact information
- Proof of assets in savings or investment accounts
In addition to reviewing the above documents, your lender will dive deeper to review your full financial history and credit history. During the process, you’ll also submit a full mortgage loan application to your lender*.
*Additional information may be required.
Which is better for you?
If you’re planning to buy a home and trying to decide between getting pre-qualified or pre-approved, we recommend that you get pre-approved for a mortgage. It takes a bit more time, but getting pre-approved provides many more benefits once you begin the home buying process.
A pre-approved buyer can feel confident that (assuming their finances and employment don’t drastically change during their home search), they can search and bid for homes that are priced within their budget.
And while getting pre-approved doesn’t automatically mean your offer will be accepted, it does signal to the seller and their agent that you are a serious buyer who has taken comprehensive steps to get pre-approved for a specific loan amount.
Tips and considerations to help you decide:
The right choice ultimately depends on what the buyer needs. Here are some examples of when you may want to get pre-approved or pre-qualified:
- Looking for a quick and general estimate on what you can spend on a home? Try getting pre-qualified.
- Are you serious about purchasing your dream property on a quick timeline? Opt for pre-approval.
- If your financial and personal documents are organized, get pre-approved.
- If you expect to enter the traditional real estate market, which is extremely competitive, set yourself up for success with pre-approval.
Home loan FAQs
Here are answers to common questions homebuyers have about mortgages and the home loan process.
Q: What is conditional loan approval?
If a lender offers conditional loan approval, it means that they are confident that your loan will be approved – but they also want you to meet a few more criteria before the closing of your home purchase. In this case, your lender will provide a conditional approval letter, which lays out the expectations you need to meet in order for your loan to become fully approved.
Common conditions include:
- Submitting additional paperwork to verify your credit or financial information.
- Offering an explanation for large, recent withdrawals.
- Providing a letter explaining the source of your mortgage gift funds.
Q: What does ‘fully underwritten pre-approval’ mean?
Fully underwritten pre-approval is the most secure type of pre-approval; it is essentially a guarantee from your lender that your loan will be approved once you make an offer on a house within your pre-approved budget.
Q: Do you need pre-approval to make an offer?
Technically, you can make an offer on a home without getting pre-approval. However, your offer is more likely to be seriously considered if you speak with a lender and gain pre-approval.
Remember, you will have to submit all your financial paperwork later on anyway, as your loan is approved. By getting pre-approved, you are removing some of your own risk; you will be less likely to find a dream house that slips away, or to make an offer on a house that is out of your budget.
Q: What is the difference between pre-approval and approval?
Pre-approval refers to the process of validating your financial documents and ability to work with a mortgage lender to obtain a home loan. Mortgage approval is the final step in the home loan process; it means that your lender has removed all conditions and has officially declared that your loan (and home purchase) can go through as planned. By getting pre-approved, the path to getting full mortgage approval could be quite a bit smoother and faster.
Q: What qualifications are required to acquire a home loan?
Mortgage loans also come in fixed-rate and adjustable-rate plans. Click here for more information on each loan type and the corresponding documents that are required.
Secure your mortgage and start shopping for your next home
Securing a home loan may seem complicated, but we’re here to help you every step of the way. Whether you’re pre-qualified, pre-approved, or still at the starting line, you’ll want to secure the representation of a REALTOR® you can trust. Begin your home buying process by reaching out to Edina Realty or your agent today.