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- Mortgage Pre-Approval vs. Pre-Qualification: What’s the Difference?
Mortgage Pre-Approval vs. Pre-Qualification: What’s the Difference?
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Mortgage pre-approval vs. pre-qualification -- these terms are often used interchangeably, by homebuyers and by some real estate professionals. But they are not the same. The terms have different meanings, and it’s important for potential buyers to know the difference.
Below, we’ll explore mortgage pre-approval vs. pre-qualification and learn what the differences are and when each one is the smart move.
A mortgage pre-qualification occurs when you submit basic information to obtain a rate quote. The process is usually quick and informal. But it does not represent an actual commitment to lend you money.
A mortgage pre-approval, on the other hand, is a thorough process in which the information you submit gets verified. A mortgage pre-approval is a commitment from the lender that -- if all circumstances remain unchanged when it's time to submit the final loan application -- the loan will be approved. Having a pre-approval letter in-hand can carry a lot of weight when you’re shopping for a home.
Below, we’ll cover more details about mortgage pre-approval vs. pre-qualification and which one is the right tool to use in specific circumstances.
Mortgage pre-approval vs. pre-qualification: which is better?
When it comes to mortgage pre-approval vs. pre-qualification, it's important to keep in mind their two distinct purposes. Pre-approval is a commitment to lend. Pre-qualification is a quick and easy way to learn about mortgage possibilities when you plan to buy a home.
When deciding between mortgage pre-approval vs. pre-qualification, it's most important to know that not everyone gets pre-approval, but just about anyone can get pre-qualified.
Anyone can get a mortgage pre-qualification because it’s based on information that you provide. For a mortgage "pre-qual," most lenders run a soft credit check, which gives them your credit score and a few details, but not your full credit history. (By the way, this kind of "soft" pull doesn’t affect your score at all.) The lender generally won’t verify employment, review your financial documents, or confirm your assets for a pre-qual.
Here’s a mortgage pre-approval vs. pre-qualification example. U.S. Bank uses pre-qualification to determine if a borrower’s debt-to-income ratio is within its lending standards, but doesn’t examine detailed information about the borrower or perform a credit check. Pre-approval, however, entails verifying the information in your application.
This isn’t to say that a pre-qualification isn’t useful. A mortgage pre-qualification can be a great first step in your buying process -- use a pre-qual to learn how much you can afford to borrow before you start looking at homes.
Mortgage pre-approval vs. pre-qualification: which process takes longer?
When it comes time to weigh mortgage pre-approval vs pre-qualification, remember you can usually apply for a pre-qualification and get results in a few minutes.
Loan pre-approval takes a little longer because the loan underwriter verifies all the information you provide. A pre-approval is basically a mortgage application without a specific home attached to the application. The lender checks your credit report, and verifies your employment history, income, and assets.
Even with the higher level of scrutiny, if the lender can digitally verify your information, your pre-approval could be ready within a day. In some cases, you may have to wait two to three days for an answer.
Here’s a sampling of items you may need to submit to the lender to obtain a mortgage pre-approval (this list is by no means exhaustive):
- Your residential address(es) for the past two years, along with contact information for landlords if you have them
- Bank statements for all checking, savings, and other asset accounts
- Pay stubs from the past 30 days
- W-2s for the past two years
- Your Social Security number, so the lender can pull your credit report and score
You may be asked to provide additional documents if they apply to you, such as proof of child support, or documentation of any gift funds you plan to use.
Many lenders offer mortgage pre-approval for free, but some charge. If you are asked to enter a credit card number when you submit your application, that is, of course, a good indication you’re going to be charged. The lender may refund your application fee if you take the loan.
Once you are pre-approved for a mortgage, the lender gives you a mortgage pre-approval letter. The pre-approval letter includes information about the lender, the home loan program for which you’ve been approved, and the maximum amount of money they are willing to lend you. (Some lenders also offer a pre-qualification letter, but again, it’s not a commitment to lend.)
Loan pre-approval can help you tremendously as a prospective buyer
If you’re weighing the pros and cons of mortgage pre-approval vs. pre-qualification, consider that a mortgage pre-approval letter can be an important shopping tool. The last thing a seller wants is to take their home off the market for a month or longer, only to have to re-list it because the homebuyer couldn’t get a mortgage loan. In fact, some sellers only entertain pre-approved and all-cash offers.
While a pre-approval letter doesn’t give you quite the offer strength of a cash buyer -- since final mortgage approval comes later -- it is the next-best thing. A pre-approval tells sellers you are serious and prepared.
An important detail to know: you can typically request a pre-approval letter for an amount lower than your full approved amount. That way, if you want to offer $250,000 for a home, you don’t need to tell the seller you’ve been approved for as much as $300,000. Most lenders are happy to provide this letter, and it can be an effective component of your negotiating strategy.
Mortgage pre-approval vs. pre-qualification: which one is required?
Whichever option you go with after considering mortgage pre-approval vs. pre-qualification, the final decision is up to you. They are both optional -- you don’t absolutely need to obtain a mortgage pre-approval letter to start shopping for a home.
However, both can be useful parts of the mortgage process.
First, a mortgage pre-qualification tells you what ballpark price range to shop in. It’s especially useful for people who have no idea how much house they can afford. It can also alert you to steps you should take to improve your credit standing or financial situation before starting your home search. For example, you might find out you could get a better rate if you raise your credit score by just a few points. A pre-qual can help you learn how firm your footing is.
Mortgage pre-approval says you can get a loan, and for how much. And from a seller's perspective, a pre-approved buyer is more likely to be able to close on the home at the agreed price.
Obtain multiple pre-approvals to find the best loan
You can use pre-approvals to rate-shop if you apply for pre-approval with a few lenders and compare offers. You can apply to the lenders separately, or go through a mortgage broker.
Whether you obtain a mortgage pre-approval or pre-qualification, the lender tells you the interest rate you qualify for. You might be shocked to know how much difference even very small variations in the interest rate make. For example, on a $250,000 30-year fixed-rate mortgage, the difference between a 4.75% interest rate and 4.80% is nearly $2,900 in savings over the term of the loan. Why put that money into someone else’s pocket if you don’t have to?
Even if two banks offer you the same interest rate, the fees they charge can vary significantly.
Furthermore, applying to a few lenders won’t hurt your credit score. There are special rules in the FICO and the VantageScore credit-scoring formulas that encourage consumers to shop for the best mortgage. While it’s true that each time you apply for new credit your score could dip, all mortgage applications you make within a specified shopping period count as a single inquiry for scoring purposes.
That means you can apply for pre-approval with one, two, five, or 100 mortgage lenders. The effect on your credit score is the same -- as long as you make all your applications inside the shopping window. It’s between 14 and 30 days, depending on the scoring model (stick with 14, since you won’t know what credit-scoring model a lender is using).
When it comes to mortgage pre-approval vs. pre-qualification, both are good tools. Shopping around during your pre-approval process can save you money. You don’t have anything to lose, except maybe a few hours of your time, and doing so could save you thousands of dollars.
Choosing mortgage pre-approval vs. pre-qualification can be easy. Pre-qual comes when you are educating yourself, before you shop. Pre-approval comes when it’s time to choose a lender and prepare to make an offer.
About the Author
Kimberly is a personal finance writer/editor, consumer credit expert, and financial literacy advocate. She has lots of degrees and personal experience that make her really good at helping people separate the good from the bad in financial products and habits. She likes to roller skate. Tweet her @rotterwrites.
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