7 min read

Mortgage Pre-Approval vs Pre-Qualification

Dec 22, 2021 3:02:20 PM

Even before you start your home search, you’ll probably be putting together numbers and examining your monthly budget to find out how much home you can afford. You may also be looking at your credit reports and credit score, paying down credit cards or student loans, and gathering financial documents to prepare for the mortgage application and mortgage approval process. Once you find a first-time home buyer real estate agent, you’ll be connecting with some lenders and initiating either a pre-approval or pre-qualification process.

Mortgage Pre-Approval vs Pre-Qualification

You may be wondering what the differences are between these two processes and which one you should pursue first. In this comprehensive guide, we’ll give you a complete overview of pre-approval vs pre-qualification for a mortgage, including key differences and special considerations so that you know what to expect up front.

Pre-Qualified vs. Pre-Approved: An Overview

While many people use these terms interchangeably in casual conversation, there is actually a significant difference between mortgage pre-qualification and mortgage pre-approval. Put simply, pre-qualification is generally something that you do for yourself and for your real estate agent. It provides a rough overview of your overall buying power based on a casual review of the information you provide.

Pre-approval, on the other hand, requires documentation and is the first step in the mortgage application process. What’s more, pre-approval can give you a significant advantage during the home purchase process, something that you probably won’t get with a pre-qualification letter or document.

Key Takeaways

  • The lending process is, in many ways, the first step toward homeownership. Working with a lender proactively allows you to find out how much house you can afford before you begin your search.
  • Pre-qualification is a preliminary step that allows you to begin crunching numbers in cooperation with your lender. However, because it is based on unverified numbers you provide, it does not give you a fully developed understanding of your buying power.
  • Pre-approval is a more comprehensive process that gives you, your lender, your real estate agent, and potential sellers a fuller picture of your financial fitness. Because it is based on documented and verified information, pre-approval offers added reassurance of your financial status, a significant advantage during the home buying process.

Pre-Qualified

When you’re first beginning your home purchase process, you may have little idea of how much house you could potentially qualify for and what type of financing you can secure. Pre-qualification allows you to ask a prospective lender some questions and provide some information up front, then get a ballpark estimate of the amount of home, and home mortgage, for which you may qualify.

This offers you the ability to begin your home search with a realistic price range in mind. That way, you and your real estate agent can narrow down your search to suitable neighborhoods, home types, and home sizes.

Pre-Approved

Once you’ve gotten a little further into your home search, you will want to be prepared to make an offer when you find the right home for you. Thus, you will want to be pre-approved for a mortgage. Unlike pre-qualification, pre-approval is a more involved process where you give your lender additional information and documentation to back up the information you’re providing.

As its name suggests, pre-approval is a way for your bank or mortgage company to indicate both to you and to prospective sellers that you are eligible for a mortgage through the lender, subject to underwriting and a firm loan commitment. For sellers, it is a reassuring sign that you are a serious and qualified home buyer. For you, it provides a better idea of how much home you can afford and what types of terms you can expect to secure.

Because of its impact on sellers, you’ll definitely want to seek pre-approval before you enter into a negotiation, especially if you anticipate a lot of competition for the home you’ve chosen or the market where it’s located. In multiple offer situations, a pre-approval is not only a good idea; it is expected in order to put in a competitive offer and present yourself as a credible buyer.

Key Differences

Pre-qualification and pre-approval differ in a variety of ways, from their purposes to their timelines. For example:

  • Pre-qualification can be done quickly, often over the phone or online with a response provided in just minutes. Pre-approval usually takes more time, often up to 10 business days depending on how organized you are and how quickly you can provide the lender’s required information.
  • Pre-qualification is generally based on information you provide yourself along with, typically, a soft credit inquiry that will not impact your credit score. Pre-approval is based on verified and documented information and involves a hard credit inquiry, which can have a negative impact on your credit score.
  • You may be able to obtain pre-qualification from a number of lenders in order to compare their rates and available mortgage products. You will want to obtain pre-approval from only one, however, because of the impact on your credit score. In addition, many lenders require an application for pre-approval, with fees that can add up to hundreds of dollars.
  • Pre-qualification is a reflection of overall market conditions and is based on unverified information that you provide. Therefore, it is merely a short-term snapshot of your financial situation at the time it is obtained. You may be able to lock in your interest rate during the pre-approval process and your pre-approval may last for up to 90 days before it needs to be renewed.

Special Considerations

It is important to remember that pre-approval does not guarantee final approval of the mortgage nor is it a firm commitment on behalf of the bank or lending institution. Final approval is based on both the financial fitness of the borrower and the condition of the property along with the specific requirements of the loan product you choose.

For example, some types of home loans, like FHA and VA mortgages, include specific appraisal requirements, called “minimum property standards,” to ensure that the home you are purchasing is in good condition. Failure to meet these standards would result in your lender turning down the mortgage loan unless the owner was willing to make necessary repairs.

In other cases, a home may not appraise for the value negotiated in the purchase agreement. If this problem occurs during the appraisal process and the homeowner is unwilling to renegotiate, your pre-approval may not result in final loan approval for that particular property.

In other cases, changes to your financial picture may occur that undermine the approval of your loan. You may open a new credit card or run up your balance on an existing account. You may go out and buy a new car to go with your new house. You may have a change in your income or employment status. Any of these events occurring during the underwriting process could change your pre-approval status and result in the lender declining your home loan.

One more thing to remember is that you do not have to buy at the top of your budget. Take into consideration your lifestyle and the things you like to spend money on. Do you love to travel? Do you enjoy going out with friends? Are you more focused on shopping, recreation, or hobbies? Make sure that your budget works for both your home purchase goals and the way you want to spend your money day to day.

Which is better: pre-approval or pre-qualification?

Rather than thinking in terms of better or worse, think of pre-qualification and pre-approval as two stages in the same process.

Pre-qualification is a great way for you to start out your home search process without wasting time on homes that are outside of your price range. It helps give your agent a better understanding of the type of home you might be able to afford and helps them put together a better range of options for you. Most of all, it gives you a wealth of information without impacting your credit score negatively.

Subsequently, pre-approval will be an important part of putting together a winning offer for the home you choose. It gives you a better idea of your interest rate and purchasing power while letting the sellers and their agent know that you are ready, willing, and able to negotiate seriously for the home.

What is the difference between a pre-qualification and pre-approval letter?

In a negotiation, a pre-approval letter is preferred over a pre-qualification letter. This is especially true in a multiple offer scenario, where you will be competing against cash buyers and pre-approved borrowers.

A pre-approval letter will be specific to the property and to the amount of money you’re offering for it. This shows sellers that you are serious about negotiating for and pursuing the purchase of their specific property, separating you from any “lookie-loos” who may simply be feeling out sellers and looking for a bargain.

It sometimes happens that you find your dream home more quickly than you anticipated, so you may not have started the pre-approval process in time to put in an offer. Talk to your lender during the pre-qualification process to find out what they will need in order to provide your pre-approval and how quickly they can do so once you initiate the process. Get organized on your end so that you can provide the needed documentation quickly in the event that you need to move forward under a time crunch.

In addition, have your buyer’s agent talk to the listing agent and let them know when they can expect your pre-approval letter. If there are no other credible offers, you may be able to put in a preliminary offer with your pre-qualification letter, then follow up with your pre-approval once it becomes available.

If you’re ready to make your real estate dreams a reality, you need the help of the right real estate professional. Dwellful provides an unbiased, personalized agent finder so that you can find a buyer’s agent in your target market. Need a referral to a lender or mortgage broker for your home purchase? Your real estate agent can tap into their professional network, ensuring that you have access to the best services for every stage of your real estate transaction.

Get Started

Christy Murdock

Written by Christy Murdock

Christy Murdock is a content writer, consultant, and coach who helps real estate and business professionals stand out as industry leaders through effective content marketing strategies. As a contributor and educator for leading real estate companies such as Inman and ReminderMedia, Christy is a trusted leader in real estate marketing. Through her company Writing Real Estate, Christy writes blogs, property descriptions, websites, and promotional copy that increases traffic and results in higher conversions for real estate agents, brokers and other professionals.

Featured