When it comes to obtaining a mortgage, it’s important to understand the difference between getting pre-qualified and getting pre-approved. While these terms are often used interchangeably, they actually refer to two distinct steps in the loan approval process. In this article, we will explore the definitions of pre-qualification and pre-approval, as well as the disparities between them.

What is Pre-Qualification?

Pre-qualification is an initial assessment that determines if you meet a lender’s criteria for a mortgage. You provide some basic information, such as approximate income, debt and estimated credit-score range. Pre-qualification can be as simple as a quick phone call with a lender. Afterward, you may or may not get a letter outlining the loan types you qualify for and the potential loan amount.

It’s important to note that pre-qualification does not guarantee a loan. A recent survey found that around 27% of prospective buyers who haven’t worked with an agent yet have been pre-qualified. However, this first step can help you understand your loan eligibility and set a realistic budget for buying a home.

What is Pre-Approval?

Pre-approval is a more comprehensive verification process that signifies a conditional commitment from a lender to approve you for a mortgage, provided you continue to meet their conditions until closing. To obtain pre-approval, you will need to provide documentation such as bank statements, W2s, pay stubs, and undergo a credit check. The type of inquiry made on your credit report (soft or hard) depends on the lender’s pre-approval process.

Once pre-approved, you will receive a letter detailing the loan amount, eligible loan programs (e.g., conventional, FHA, VA), estimated interest rate, and annual percentage rate (APR). If you meet the lender’s financial loan qualifications during the underwriting process, you will receive final loan approval. However, it’s important to complete a loan application before being fully approved for a specific loan program.

A pre-approval letter can enhance your credibility as a buyer and signal to sellers and real estate agents that you are serious about purchasing a home.

Key Differences Between Pre-Qualification and Pre-Approval

While both pre-qualification and pre-approval help determine your price range, there are notable distinctions between the two. Here are some key comparisons:

  • Pre-qualification provides a starting point for your home buying journey, helping you understand your loan eligibility and establish a reasonable budget. Pre-approval offers a more concrete understanding of your budget, enabling you to make offers and demonstrating your seriousness as a buyer.
  • Pre-qualification relies on self-reported financial information, while pre-approval requires documentation to verify your financials.
  • A pre-approval letter carries more weight than a pre-qualification because it represents a conditional commitment from a lender to approve your loan.