The difference is in the process. You will likely hear the terms pre-approval and pre-qualification while doing some research about buying a home and getting a mortgage for it. Familiarity and constant use make them mean the same, except that they don’t.
Pre-approval has more weight between the two, although pre-qualification is still with a purpose. For beginners or those who need some refresher on the mortgage process, a good place to start is differentiating pre-approval and pre-qualification.
Pre-approval vs Pre-qualification
Your mortgage application can start with pre-qualification. If you have no idea about your ability to qualify for a mortgage based on your financial capacity, pre-qualifying is a good way to test that out.
The loan officer can ask you about your job or income and based on the financial picture you’ve given, draw an approximation of how much you can qualify to borrow.
Acing the pre-qualification exam does not mean that the lender will give you a loan. Truth be told, it requires more than that to get a mortgage just so borrowers are given safe loan products and lenders are sure that these borrowers can repay the mortgages made to them.
Pre-approval Takes It a Step Further
Pre-approval is definitely a step further in the mortgage application process. It serves as your preliminary loan application.
The process is more involved this time: the loan officer asks about your income, assets, debts, etc and then you are required to submit the necessary documentation to support your financial information.
Pay stubs, bank statements, tax returns and proofs of assets are just some pertinent documents you’ll be needing to get pre-approved. The loan officer will verify and check them.
It’s also at this stage when the loan officer pulls a very important piece of information that primarily affects your mortgage prospects: your credit file.
Your credit score will help you secure a low interest rate on your mortgage. If your credit score is middling, e.g. below 580, you might still qualify for an FHA loan with a competitive rate but the down payment is higher.
Passing the pre-approval stage is important because you get to go home with a letter containing the mortgage amount you qualified for.
The implication of this pre-approval letter is that you have secured financing to back your offer. You can show this to the seller of the home you are eyeing, putting you almost on par with cash buyers.
If anything, the pre-approval letter is not the actual loan from the lender; you don’t also have to pursue a certain loan from a pre-approved lender as you can choose from your other pre-approval offers.
There Lies the Difference
- Pre-qualification is a preliminary check on your financial background based on what you told the loan officer. Important when you want to know your actual chances of getting a mortgage.
- Pre-approval is a more involved process: your financial and credit information is asked, checked and verified with the necessary documentation. The lender will hand out the mortgage loan amount and you can use it to cement your offer on a home.
If there’s one thing these two processes are aligned, it is to give you a fairly good idea on what to expect in the actual mortgage application process.
By the time you submit your completed loan form, you’ll have prepared your paperwork, credit score, loan-to-value, debt-to-income and other things you can improve on for a more stress-free home buying journey.