If you’re gearing up to buy a home, you might be confused by some of the mortgage terminology you encounter. Like pre-qualification or pre-approval. You have a vague idea that at some point in your journey, you’re probably going to need at least one of them. But what exactly are they? What’s the difference between them? And is one stronger than the other?
Let’s lay it all out:
How pre-qualifications and pre-approvals are similar
Pre-qualifications and pre-approvals have a few things in common. They can both act as documentation for you to take to home sellers to show that you’re likely to be approved for a mortgage. They both estimate the size of the home loan you can expect to get. And they both help you make a more competitive offer than you could without any lender documentation. In fact, many sellers require either a pre-qualification or pre-approval letter before they’ll even consider your offer.
Before jumping into the differences between pre-qualifications and pre-approvals, you should understand that neither guarantees a mortgage or an accepted offer. Think of them as important first steps to getting into the home of your dreams.
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What’s a pre-qualification?
Getting a pre-qualification is often the first thing you do when you’re ready to secure home financing. Typically, to get a pre-qualification, you simply provide a lender with an estimated overview of your financial picture. That includes your income, assets, debts, and credit score. Filling out the pre-qualification form should take just a few minutes. Most lenders have them readily available online.
The catch with the pre-qualification is that your information is not checked or vetted. You don’t need to provide any documentation. You simply fill out a form online, by phone or in person. And voila, within minutes, you have a pre-qualification.
While a pre-qualification can certainly help you make a stronger offer on a home, having one is never a guarantee your mortgage loan will be approved. There are many reasons for this, but the biggest reason is that your lender has not yet fully checked out your financials. At this stage, they can’t possibly know whether it’s worth the risk to lend to you.
For example, say you obtain your credit score from a credit estimator site. Then you actually apply for the mortgage and learn that your official credit score is lower than you realized. This could disqualify you for the loan.
What’s a pre-approval?
A pre-approval is a step up from a pre-qualification. A pre-qualification is more of an estimate, while a pre-approval is more of a true conditional loan approval issued after your income and assets have been fully underwritten.
To obtain a pre-approval, you must fill out a mortgage application and give your lender full documentation of your financials. The lender will verify your financials and run a credit check. Then they’ll give you a conditional approval stating the size of the mortgage you’ve been pre-approved for. They’ll also likely give you a much better idea of the rate you’ll be paying.
While a pre-approval can give you more confidence in the home buying process, it still doesn’t guarantee you a mortgage. It’s merely an important step, and one that can give you an advantage, especially in a competitive market.
Why a strong pre-approval gives you an advantage
Sellers are always looking to select the strongest offer possible. No seller wants to go through the frustration of accepting an offer, and then have the deal fall through because the buyer couldn’t secure proper financing. This is why so many home sellers favor cash: it’s a sure thing.
Say a home seller is assessing three offers. Two of the offers are from buyers with pre-qualification letters, and one buyer has gone through the pre-approval process. There’s a good chance the seller will choose the pre-approved buyer, because they’ve already had their financials assessed. This takes an unknown out of the equation and gives the seller more certainty in closing the deal.
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FAQs
A mortgage prequalification is a good way to estimate how much home you can afford. A preapproval takes it one step further and verifies the financial information you submit to calculate a more accurate amount. Getting approved early in your home search is a great way to know what you can afford.
Which is stronger a pre-approval or pre-qualification? ›
The biggest difference between the two is that getting pre-qualified is typically a faster and less detailed process, while pre-approvals are more comprehensive and take longer. Getting a pre-qualification or pre-approval letter is generally not a guarantee that you will secure a loan from the lender.
How accurate are pre-qualifications? ›
A pre-qualification is a mortgage approval based on self-reported information. It doesn't verify a buyer's credit score, income, or money in the bank. It's an estimate only. A pre-approval is mortgage approval based on verified data.
What's the primary benefit of being prequalified for a mortgage pick the best answer? ›
Pre-qualifying helps you get real about budget.
The general rule of thumb is your monthly home-ownership expenses, which include mortgage, taxes, insurance, and utilities, should not exceed 28% of your total income. The pre-qualification process gives shape to this monthly figure.
Is a pre-qualification letter the same as a pre-approval letter? ›
Some lenders may use the word “prequalification,” while other lenders may call the letter a “preapproval.” Some lenders offer a prequalification letter based on unverified information that you report and will only issue a preapproval letter based on verified information.
What is the difference between pre-qualification and pre approved? ›
Pre-qualification means that the mortgage lender has reviewed the financial information you have provided and believes you will qualify for a loan. Pre-approval is the second step in the loan process, which is a conditional commitment to loan you the money for a mortgage.
What credit score is needed for pre-approval? ›
A credit score of at least 620 is recommended to qualify for a mortgage, and a higher one will qualify you for better rates. Generally, a credit score of 740 or above will enable you to qualify for the best mortgage rates.
Can you be denied after prequalification? ›
However, even though prospective homebuyers get pre-approved for a mortgage before shopping for homes, there's no 100% guarantee they'll successfully get financing. Mortgages can get denied and real estate deals can fall apart — even after the buyer is pre-approved.
What are the chances of getting denied after pre-approval? ›
What are my chances of getting denied after preapproval?
| Loan program and purpose | Closing rate |
|---|
| Conventional purchase | 80% |
| FHA refinance | 65% |
| FHA purchase | 78% |
| VA refinance | 72% |
2 more rowsThere are a variety of reasons why your loan preapproval may have been declined by the lender. Some common reasons for denial could include: Your credit score is too low. You don't have enough credit history.
Getting pre-qualified or pre-approved for a credit card doesn't guarantee approval. Pre-qualification and pre-approval for credit cards both typically involve soft inquiries, which don't affect credit scores. Applying for new credit generally requires a hard inquiry, which could temporarily cause credit scores to dip.
Does it hurt to get pre qualified for a mortgage? ›
No. “Mortgage prequalification does not impact your credit score like a mortgage preapproval,” says Troy Robillard, a licensed real estate agent with Premiere Plus Realty, a company with offices throughout Florida. “This is because the lender is not actually making a loan commitment when they prequalify you.
Is a mortgage pre-qualification a hard inquiry? ›
Yes, a pre-approval is a hard inquiry. Applying for a pre-approval through a mortgage lender is a standard step in the mortgage approval process because it involves lenders looking at more detailed information. Because lenders give loans for large amounts of money, hard inquiry credit checks are routine.
How good is a pre-approval letter good for? ›
You will complete a mortgage application and the lender will verify the information you provide. They'll also perform a credit check. If you're preapproved, you'll receive a preapproval letter, which is an offer (but not a commitment) to lend you a specific amount, good for 90 days.
Can I offer more than my pre-approval letter? ›
Usually, the preapproval shows the maximum purchase price/loan amount the lender will preapprove you for, and comes with an expiration date. If you try to make an offer on a home for an amount higher than you're preapproved for, sellers are likely to ignore the offer because you won't get approved for the loan.
What is required for a prequalification letter? ›
Key Takeaways
Pre-approval requires proof of employment, assets, income tax returns, and a qualifying credit score. Mortgage pre-approval letters are typically valid for 60 to 90 days. Upon pre-approval, the lender will provide the maximum loan amount, which helps set a price range for the home shopper.
Does prequalification do a hard credit pull? ›
Prequalification is typically considered a soft inquiry, and it won't hurt your credit all on its own.
How do I get the highest preapproval? ›
You can take various steps to increase your preapproval amount. These include making a higher down payment, getting a longer loan term, finding a co-signer and, perhaps, becoming preapproved by multiple lenders. It's also best to start the home buying process in a position of financial strength.
How bad does a pre-approval affect credit score? ›
Credit card pre-approval doesn't typically impact your credit scores because the process usually involves a soft inquiry. Applying for a credit card typically requires a hard credit inquiry, which could cause credit scores to drop temporarily.
