The mortgage process typically includes getting pre-qualified and/or pre-approved. They are not the same, and in a competitive market, knowing which to get could be the difference between a successful closing and wasted time on the market.
What Does it Mean to be Pre-Qualified?
Being pre-qualified means, a lender has decided you will likely be approved for a loan up to a certain amount, based on your current financial situation.
To get pre-qualified, you simply tell a lender your level of income, assets, and debt. The lender will then take that unverified information and determine how much you will likely be approved for. There are no guarantees you will actually be approved for the same amount.
- No effect on credit score
- No fees
- Helps you estimate what you can afford
- Good for first-time home buyers
While pre-qualification is often the first step of the mortgage process, some sellers will not take you seriously until you’ve been pre-approved.
What Does it Mean to be Pre-Approved?
Being pre-approved means you have actually been approved by a lender for a specific loan amount. When pre-approved, you will receive a letter that states your approved loan amount.
Unlike getting pre-qualified, when getting pre-approved, you provide documented financial information (pay stubs, statements, obligations, credit report, etc.) to be reviewed and verified by the lender.
- No fees
- Gives you negotiation power
- Helps you know exactly what you can afford
- Allows you to close faster
Something to keep in mind is that being pre-approved does not guarantee you a loan. You still have to complete the application, go through the underwriting process, and wait for final approval. But being pre-approved indicates your intent to purchase, so sellers look fondly upon buyers with pre-approval letters.