Pre-Approval vs. Pre-Qualification

When you’re ready to start shopping for a home you’ll have quite a to-do list including finding an agent, determining what type of property you’re looking for as well as how much you can afford to spend, and you’ll also need to begin engaging with a lender to confirm you qualify for a loan. 

Pre-qualification and pre-approval are terms that are often used interchangeably but actually mean very different things. Both are processes you may go through when trying to obtain a mortgage but you’ll want to be sure you know the difference between the two before you jump in. 

Pre-qualification:

Pre-qualification is like dipping your toe in the mortgage water. Obtaining pre-qualification is an initial step in the mortgage process where a lender evaluates your finances based on self-reported information. You can obtain a quick pre-qualification by entering high-level financial information like your income and account balances into an online form. Based on this information and a soft credit inquiry a lender can estimate how much they might be willing to lend you in order to purchase a home. It’s basically a lender providing a letter that says ‘based on information provided to us, we estimate we can lend $XXX,XXX.’ Pre-qualification is a helpful starting point to understand your potential buying power, but it is not a guarantee or commitment from a lender.  

Pre-approval:

Pre-approval is a more detailed and involved process than pre-qualification. Pre-Approval is basically full underwriting that will happen when applying for a mortgage. A lender will require you to submit documentation such as pay stubs, account statements and tax returns which they will go through with a fine-tooth comb. They will also conduct a hard credit inquiry for you and anyone else you might have on the loan. Based on their findings a lender will issue a pre-approval letter that is a much stronger stamp of approval than prequalification and likely has a more accurate estimate for the amount you could be approved for. A pre-approval letter will make you a more desirable client for an agent and a more attractive buyer to a seller than someone who is not preapproved. There is less risk that your funding will fall through with a preapproval letter.   

You may find yourself going through both of these processes, but it’s important to know which one you’re pursuing and when. Prequalification is a great place to start if you’re just beginning the process. You can be prequalified with little effort and no impact to your credit and there is no obligation to use the company that prequalifies you for your mortgage. A pre approval will require more effort and time and should only be done when you’re getting serious about making offers on properties.