Purchasing a home is a big deal. When the time comes, whether it’s your first home or you are moving into a new one, you’re most likely in need of a mortgage. With all of the information available, it can be overwhelming knowing where you’re supposed to start.
Pre-approval and pre-qualification are two terms that seem to be used interchangeably, depending on your lender. However, the differences are subtle, and figuring out which one you’re supposed to pursue can be challenging.
Let’s look at the differences between pre-qualified and pre-approval so you can determine the one that’s right for you.
Getting a letter in the mail that you’re “pre-qualified” for a loan or credit card essentially means that the creditor has done a fundamental review of your creditworthiness and you seem like a good candidate for a loan.
Typically, a consumer has initiated the process by completing and submitting a prequalification application. Requirements for prequalification vary by lender and involve sharing basic financial information like your annual income, monthly housing payments, and any savings you may have.
In some cases:
A lender may check your credit by initiating a “soft inquiry” into a credit bureau to get a glimpse of your credit background.
Be aware that a “soft inquiry” has no impact on your credit score. But it can give the lender enough information to decide whether or not you would meet the minimum requirements for lending.
At this stage, the lender may come back and tell you that you are “pre-qualified.” You can choose whether or not you want to make an official application and continue with the review process.
This usually requires you to submit official documentation and agree to a hard inquiry on your credit report, which can impact your credit score. It’s important to note that while you may pass the prequalified bar, it doesn’t guarantee that you will be approved.
The benefit of prequalification is that if you get denied at this stage, you can move on to another lender or creditor without having a hard inquiry impact your credit score.
With pre-qualification, you’re only receiving a ballpark estimate of how much you can borrow. Your lender is only taking into consideration the data that you provide without requiring validation. There is no commitment to the lender’s part to guaranteeing you will be pre-approved or approved. It’s merely a high-level evaluation of whether or not you’re eligible for a mortgage loan, and a rough estimate of how much it could be.
A pre-approval confirmation is the next step after pre-qualification, and you’ve submitted the proper documentation to complete a hard inquiry.
Pre-approval requires you to complete an official mortgage application, including all the necessary documentation for an extensive evaluation of your financial history and situation. A pre-approval application sometimes requires an application fee, depending on the lender, and can cost several hundred dollars.
Once the lender completes your preapproval application, they will typically specify a maximum amount of credit they are willing to give you. They will also give you an idea of the interest rate you can expect to pay.
Once you are preapproved, you will receive a conditional commitment from the lender in writing for the exact home loan amount you are qualified for. With this document, you’ll know exactly how much you can afford for a home, and you can look for places that are at or below your approved price level.
With a preapproval in hand, you’re not only one step closer to getting an actual mortgage, but sellers will know that you’ve secured a home loan amount, and you’re serious about buying.
What’s Really the Difference?
While preapproval and prequalification are similar, there are slight differences.
With pre-qualification, it’s considered the first step in a mortgage process, while pre-approval is the second step. A prequalification is simply a high-level overview of your financial history and typically doesn’t require documentation to verify.
Moving into pre-approval does require hard evidence and documentation of your financial situation, including all your income, assets, and debts, and a deep dive into your credit history resulting in a hard inquiry on your credit report.
Which Is Right For You?
To figure out whether you need to be pre-qualified for a mortgage or gain pre-approval, you need to look at the lender’s definition of each.
Because: These words are interchangeable in different companies, it can be hard to know which one you should be focusing on.
Ask your lender how they define pre-approval and pre-qualification, and which requires a credit check as a hard inquiry. You’ll also want to check-in with your real estate agent, as they have an inside view into which is required and provides more credibility for the market in which you’re looking to buy.
Since the definitions of pre-approval and pre-qualification can vary, you need to ask your lender about their process and the interpretations they use. While neither pre-approval nor pre-qualification guarantees a loan offer, both can give you an idea of how much you may be able to borrow to purchase your home.
The home buying process can be confusing, especially when you’re dealing with terms that are often used interchangeably. That’s why your best course of action is to talk with your real estate agent and prospective lenders about their process and what’s need to meet the minimum requirements for home buying.
Good luck, and happy house hunting!