What is the difference between pre-qualification and pre-approval? What type of mortgage loan should I apply for? How can I work with a lender to get the best interest rate? As a first-time homebuyer, you may be overwhelmed by the home loan process — and by all the terms that you encounter as you work to secure mortgage approval.
First, let’s discuss the difference between two important terms: mortgage pre-qualification vs. pre-approval. These are the two most common preliminary steps in applying for a home mortgage loan, but they each have different requirements and unique benefits.
Pre-approval vs. pre-qualification at a glance
Getting pre-qualified and pre-approved for a mortgage are both important steps in the homebuying process. While pre-qualification and pre-approval may seem intimidating, they don’t have to be!
Main differences between getting pre-qualified and pre-approved
First of all, let’s be perfectly clear: pre-approval is not the same as pre-qualification. These two terms refer to separate processes when applying for a home mortgage loan.
A pre-qualification is a rough estimate of what you might be able to borrow for your mortgage. Pre-qualification is based on your “best guess” of information, which hasn’t been verified by the lender.
In contrast, mortgage pre-approval is the most comprehensive step a buyer can take toward attaining a home mortgage. To get pre-approved for a mortgage, the buyer will submit an official mortgage application and document their financial history for their lender. Once the lender verifies the information, they will offer a pre-approval letter to the buyer, stating that the buyer is “pre-approved” for a mortgage loan of a certain amount, with specific terms.
Key similarities between pre-qualification and pre-approval
Pre-qualification and pre-approval both help you determine your search parameters and the amount of money you will likely be able to borrow for a mortgage. However, sellers tend to take pre-approved buyers more seriously than pre-qualified buyers, because only pre-approved buyers have been truly vetted by a lender.
What does pre-qualified mean?
Pre-qualification can be the first step in the mortgage process. In a pre-qualification, buyers can provide their own financial information, and the lender returns a general evaluation of the loan amount that the buyer can likely secure. Most lenders provide pre-qualifications for free, and they can be completed in a short time over the phone or online.
The pre-qualification amount is mainly for the buyer’s personal reference. Because the buyer’s finances were self-reported and not evaluated directly by a lender, a pre-qualification shouldn’t be submitted to a home seller as evidence of a buyer’s creditworthiness.
Primary benefits of being pre-qualified for a mortgage
The benefits of pre-qualification are for the buyers. A pre-qualification:
- Can be the first step in the house-hunting process.
- Can help establish a preliminary home buying budget.
What does pre-approval mean?
The second step towards obtaining a mortgage, pre-approval, is a much more involved and thorough process. Here, the buyer turns in an official mortgage application and provides the lender with an extensive financial history. In return, the lender provides a more specific intended loan amount as well as the estimated interest rate the buyer can expect (assuming rates hold).
In short, a home loan pre-approval can offer the borrower peace of mind as they determine their budget and buying power. And because sellers and their agents recognize the effort it takes to get pre-approved for a mortgage, they may take buyers with a pre-approval letter more seriously. In a multiple-offer scenario, sellers and their agents may not even consider an offer that doesn’t come with a pre-approval letter.
Advantages of pre-approval
The benefits of pre-approval can be for both the buyer and the seller. A pre-approval:
- Can be the first step in the home purchase process.
- Provides the buyer with an estimate of their likely budget and buying power.
- May provide an estimated interest rate, should current rates hold.
- Can help buyers stand out in a competitive market.
- Demonstrates that a buyer is serious, and ready to move quickly.
Which is better for you?
If you’re planning to buy a home and trying to decide between getting pre-qualified or pre-approved, we recommend that you get pre-approved for a mortgage. It takes a bit more time, but getting pre-approved provides many more benefits once you begin the home buying process.
A pre-approved buyer can feel confident that (assuming their finances and employment don’t drastically change during their home search), they can search and bid for homes that are priced within their budget.
And while getting pre-approved doesn’t automatically mean your offer will be accepted, it does signal to the seller and their agent that you are a serious buyer who has taken comprehensive steps to get pre-approved for a specific loan amount.
Secure your mortgage and start shopping for your next home
Securing a home loan may seem complicated, but you don’t have to go through the steps alone. Whether you’re pre-qualified, pre-approved, or still at the starting line, work with a professional you can trust. Reach out today to begin your home buying process.
This information is provided for informational purposes only and does not constitute tax, or financial advice.
All first mortgage products are provided by Prosperity Home Mortgage, LLC dba Edina Realty Mortgage. (877) 275-1762. Prosperity Home Mortgage, LLC products may not be available in all areas. Not all borrowers will qualify. Licensed by the NJ Department of Banking and Insurance. Licensed by the Delaware State Bank Commissioner. Also licensed in AL, AR, AZ, CO, CT, DC, FL, GA, IL, IN, KS, KY, LA, MA, MD, MI, MN, MO, MS, MT, NC, ND, NE, NH, OH, OK, OR, PA, RI, SC, SD, TN, TX, VA, WA, WI, WV and WY.
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