Mortgage pre-qualification vs. pre-approval

Thinking of buying a new home? Learn the difference.

Key tips to remember

  • Pre-qualification gives you an idea of what you might borrow
  • Pre-approval signals to Realtors and sellers that you can pay
  • Pre-qualified buyers are better-informed when home shopping
  • Pre-approved buyers know for sure how much they can spend
  • You might be approved for it, but don’t spend more than you can afford
Home Warranty

If you’re wondering how to get pre-approved for a home loan, or want to know the differences between pre-approval and pre-qualify processes, you’re in the right place. Taking those exciting first few steps toward purchasing your own home can also feel overwhelming. Mortgages are complicated agreements full of legalese and fine print that most people who aren’t lawyers have a hard time getting their head around fully. While the subject can indeed become complex as you dig deeper, we’re here with some good news! We’d like to help you simplify the front end of your home-buying process by shining light on the differences involved when looking at mortgage pre-qualification vs. pre-approval. Though some lenders equate the terms, they’re different for several reasons. Remember, before you get pre-approved for a mortgage, you can always use a pre-approval calculator to get an idea of what you can afford. Most banks and lending institutions feature these calculators on their websites.

Mortgage pre-qualification comes first, helping you to get a general idea of how much money you’ll likely be able to borrow, which should arrive in the form of a pre-qualification letter. After qualifying, as you keep moving forward toward your goal of homeownership, mortgage pre-approval comes next, which is more of a conditional commitment to loan you the money. Pre-qualification for mortgage loans is a more casual first step resulting in an estimate of the amount you may qualify to borrow based on information you provide a loan officer. Home-loan pre-approval takes this exchange to the next level by verifying the data you submit via credit checks and more vigorous income verification. When you’re pre-approved for mortgage loans, you receive a written, conditional commitment or mortgage pre-approval letter stating an exact amount you’ve been not only pre-qualified but also pre-approved to borrow from the lender.

Pre-qualification

To pre-qualify for a mortgage, you speak to a lending officer (over the phone, in person or online) and communicate a general idea of what your finances look like, in terms of your income, assets and debt. Based on what you report about these facts, the lender makes an estimate of the loan size you may be eligible to receive. This estimate is not a guarantee but a general idea based on the information you share. It’s also a good chance for you to ask any questions you may have about the mortgage process and to learn about various mortgage programs that may be available to you. 

The whole process takes a few days or less and shouldn’t involve a fee, but it should help you get an idea of the price range of homes you want to consider. Though you may want to wait until you are definitively pre-approved for your loan amount before making an offer on a home you’d like to purchase — signaling to the seller and any agents involved that you can put your money where your mouth is — you should at least be pre-qualified to establish your creditworthiness before making an offer.

Pre-approval

Pre-approved buyers have completed a full mortgage application and submitted all relevant paperwork (including bank statements, pay stubs and tax returns) for extensive credit and financial background checks that can take 10 days or more to complete. Buyers are sometimes required to pay a fee of up to several hundred dollars for this service, and they might be able to lock in an interest rate should they choose to accept the loan agreement. 

These applicants have been investigated more thoroughly than pre-qualified buyers. Instead of just going on their word, which is how it generally works in the pre-qualification process, lenders investigate applicants’ credit lines and demand more vigorous proof of assets, income and debt levels, using this information to arrive at an actual number that a lender is comfortable lending to this particular applicant. As such, sellers and agents have much greater confidence in buyers who make offers after being pre-approved. 

The fact is, many offers fall through due to lack of adequate financing. When you see a home listed as “pending,” this means an offer has been made, and parties involved are working to ensure that the offer is backed by legitimate financing, a process that can take a month or longer. The seller wants to sell, the buyer wants to buy, and the Realtor wants to close the deal. No parties involved want to waste anyone’s time on illegitimate offers, which is why it’s best to be pre-approved before making an offer.

Surprises

Even when you do everything right, you need to be ready for surprises. Let’s say you start by getting pre-qualified, and everything goes well. You look around at some homes and decide you’re ready to go ahead and add pre-approval to confirm your status as a reliable, upstanding buyer. You go through this second process, and everything seems fine. Suddenly, your potential lender has some in-depth questions about a loan you took out 14 years ago, car payments on a car you no longer own, or the circumstances surrounding some disputed charges on one of your credit cards. 

Don’t worry. This is not an insult or assault on your integrity. Your lender is merely doing the responsible due diligence to investigate your financial background, as would be normal for any applicant. Being prepared for these surprises means maintaining and gathering meticulous records of your financial life and being ready to find any you don’t have on hand. Expect the unexpected, relax, answer the questions, and move on. Before you know it, you’ll be pre-approved and making an offer on your new home.

Next steps

After you know how much you’re approved to borrow, your task is to find a home that you like and can afford. At this point, you’re armed with knowledge — you have the official figure, a number that tells you how much home you can purchase. However, you shouldn’t confuse your approval number with what you can afford. Many people manage to become approved for amounts they have no business borrowing. It didn’t work out well for the economy in 2008 when millions of Americans were approved for and took out loans they could not reasonably afford. 

It’s still possible to overbuy, so don’t rely on your lender to make reasonable decisions for you. Despite what you’re approved for, spend some serious time looking over the numbers and balancing your income, debt and monthly expenses against your hopes, dreams and goals for the future. It can be tempting to get the biggest, most beautiful house your loan approval amount will cover, but being house poor is never fun. Give yourself some financial room to breathe, and create your own reasonable — perhaps more conservative — definition of what you can afford.

As you study more about the mortgage process, you might be interested in our survey asking people what they would do to buy a home, our article about National Home Warranty Day or our post on how the pandemic influenced real estate markets nationwide. Thanks for stopping by!


The information in this article is intended to provide guidance on the proper maintenance and care of systems and appliances in the home. Not all of the topics mentioned are covered by our home warranty or maintenance plans. Please review your home warranty contract carefully to understand your coverage.
 

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