You know those eye-catching envelopes that you find stuffed in your mailbox? The ones that claim you’ve been “pre-qualified” or “pre-approved” for a new credit card or car loan? If you’ve been shopping for home loans, you’ve likely noticed those same terms floating around everywhere.
A lot of mortgage professionals use the terms interchangeably. If that’s confusing, we get it. Buying a home can be daunting enough as it is without needing a dictionary to define the differences between the two, and we’re here to help.
Turns out, although they’ve got key differences, both are important steps in your journey toward homeownership.
Covering the Basics
Think of pre-qualification vs. pre-approval as two circles in a Venn diagram. The two terms are closely related but represent two separate steps in the process.
According to the Consumer Financial Protection Bureau (CFPB), both options are statements from a lender estimating how much you might be able to borrow.
Fast Facts:
Pre-qualification: When you submit basic information to get a rough budget for your home purchase.
Pre-approval: When a lender completes a full review of your information (credit score, income, assets, etc.) and extends a preliminary loan offer.
Prepping for Pre-Qualification
Pre-qualifications are a solid first step in your home buying process. They’re ideal for establishing a general budget and price range for homes, and typically require answers to questions about income, employment, and debts.
Pre-qualification Pro-Tip: Your pre-qualification isn’t an official loan offer and is only as accurate as the information you provide to the lender. Artificially inflating your income won’t help much when it comes time to apply for your loan. Estimate your mortgage amount and monthly payments with our free mortgage calculator.
Pursuing Pre-Approvals
Think of a pre-qualification as a surface-level look at your information. Pre-approvals, on the other hand, require additional documentation and deeper review via underwriter before generating a conditional* offer that is (usually) good for 90 days.
In this case, a lender reviews your W-2s, pay stubs, tax returns, and more to estimate a loan amount. Pre-approvals are ideal for folks who have started their search, recruited a real estate agent, and are actively searching for a real-life loan.
*The lender will confirm your financial documents, loan terms, and other conditions before the final approval.
Pre-approval Pro-Tip: You may be pre-approved to borrow more money than you need or more than you’re comfortable spending on a home. Be mindful of your budget and don’t feel pressured to take the full amount. We recommend limiting your search to homes within a comfortable price range—something only you can decide.
Which One Is Right for You?
Now that you know the key differences between pre-qualification vs. pre-approval, it’s time to start thinking about which option best suits your needs. Ask yourself: How far along are you in the journey of homeownership? Are you just looking around, or are you ready to talk numbers? Our handy guide can point you in the right direction.
Expecting the Unexpected
While you may receive pre-qualification from a lender, that doesn’t mean you’re approved to borrow that loan amount. Pre-qualifications are a general estimate of your home loan eligibility. Pre-approvals dig a lot deeper than your everyday pre-qualification. And, neither are final home loan approval.
In some cases, lenders may provide pre-qualifications and pre-approvals for less than what you expected. Alternatively, lenders may not extend either of those options at all. If or when that happens, don’t panic. These decisions aren’t made lightly, but there are steps you can take to prepare for next time.
- Contact the lender to find out why you weren’t approved for a certain loan amount or why you were denied an offer outright. Was your credit score too low? Have certain accounts gone delinquent? Is your debt-to-income ratio too high? Knowledge is power, and the right lending partner should help you identify areas of improvement.
- Ask the lender for a copy of the credit score they used or take the time to request your own report. If your pre-approval was denied, lenders are required to provide a notice containing the credit score they used to make the decision and instructions on how to obtain a free copy of your credit report.
Now that you know the key differences between pre-qualifications and pre-approvals, it’s time to start thinking about which option best suits your needs.
The More You Know
That wraps up today’s lesson! Now that you know how pre-qualifications differ from pre-approvals, it’s time to make the next move. Are you ready to start looking at homes? Do you already have one in mind? Want to know more about mortgages? No matter where you’re at in the process, our specialists can help. Get in touch with us today!
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