Pre-Approval vs. Pre-Qualification – What’s the Difference?
If you are looking to purchase a new home, chances are you have heard the terms “pre-approval” and “pre-qualification” in regards to the mortgage process. What do these terms mean and what are their differences?
Pre-Qualified For a Loan
Although some lenders use the two terms interchangeably, to be pre-qualified for a loan typically means that a borrower has undergone an informal review of income, debt ratio, credit history and other basic guidelines that can determine the borrower’s ability to repay a loan for a particular amount at a specified interest rate. In other words, how much house can a borrower probably afford?
Usually, pre-approval relies only on stated income and borrower-provided estimates and does not delve into a formal approval process. Your lender or loan officer should be able to provide a letter affirming that you, the borrower, have been pre-qualified for a certain loan amount, and that can be used to show a seller that you are likely capable of financing the home purchase.
Pre-Approved For a Loan
Think of pre-approval as the next level up from pre-qualified. Rather than merely being validated against qualification parameters for a loan, a borrower must provide verifiable documentation, a hard credit report pull, employment and income verification and other items to more formally determine a borrower’s ability to repay a loan. Pre-approval involves many aspects of the final loan underwriting process and thus provides a more reliable indication that a borrower not only qualifies for a loan, but has also been subjected to preliminary underwriting and has been pre-approved for a loan.
Similar to the pre-qualification letter, your loan officer should be able to provide a letter indication your pre-approval status to present to a seller.
Advantages When Submitting an Offer
In a fiercely competitive real estate market, a seller not only wants to get the highest offer, but also an offer that involves the lowest amount risk. Accepting an offer from a buyer who ultimately is not able to qualify for financing is the last thing a seller wants, especially if doing so takes the home off the market for several weeks while the borrower attempts to secure financing.
Have a pre-qualification letter in hand shows the buyer that your offer price is within the range of your ability to qualify for financing, and that you are a serious buyer. On the other hand, having a pre-approval letter is an even stronger indication to a seller that you are a buyer that poses a decreased risk because you have gone the extra mile and a big chunk of the financing step has already been completed. You are that much closer to closing on your new home!
It is certainly a great idea to undergo either a pre-approval or a pre-qualification. While some in the industry may use the two terms interchangeably, they are not the same thing. A pre-approval letter from your lender is a far more powerful indication that, when combined with a strong offer, gives a buyer a leg up on other prospective buyers.
The mortgage professionals at CloseYour Mortgage offer a free, no-obligation pre-approval service. As a mortgage brokerage, they can shop multiple lenders to make sure you get the loan product you need at the lowest cost. Connect with them today and get closer to owning your dream home!