I was recently having a conversation with a first time home buyer and the question came up of whether there’s a difference between a pre-approval and a pre-qualification. The simple answer is yes there’s a big difference. Read this article to find out what the difference is and why it matters when you’re buying or selling a home.
What Is A Mortgage Pre-Approval?
For starters a mortgage pre-approval is not a guarantee you will get the loan but, it’s the closest you can get to that guarantee. There are still conditions such as locating a property, no change in your creditworthiness, and likely a satisfactory appraisal that will have to be met. The appraisal can vary in some cases. Aside from that, the pre-approval being issued means the lender has run your credit, verified your income, verified your employment, and reviewed your financial resources such as savings or retirement accounts.
A pre-qualification means a lender has given an estimate of what you may qualify for based on information you have provided. The lender may or may not run your credit. Verifying income, employment, and financial resources is not part of a pre-qualification. It simply gives you an estimate of how much you can borrow.
What’s The Difference In Being Pre-Approved And Pre-Qualified?
Obtaining a mortgage pre-approval is a far more in-depth process. You will have completed a loan application and submitted financial documentation to your lender vs. just stating what your income is. The lender will run your credit and process the application through an underwriting process in order to then issue the pre-approval.
Why Is A Pre-Approval Stronger In The Seller’s Eyes?
Having a pre-approval attached to your offer is stronger than a pre-qualification in the seller’s eyes because they then know a lender has obtained and verified your financials. It’s not just a ballpark estimate of what you may qualify for based of what you stated to the lender. If you have no idea what your financial situation is and are just starting to think about purchasing a home getting a pre-qualification is a good start. When you’re ready to buy and it’s time to start touring homes, a pre-approval is a must.
How Does A Pre-Approval Benefit A Buyer?
A pre-approval doesn’t just benefit a seller. It also benefits a buyer because it will determine what loan programs are the best option, the amount of your down payment, and give you an idea of what your interest rate will be. It doesn’t lock in your rate but, it does provide an estimate based off what rates are when it is issued.
It will also inform you of what the maximum sale price is that you are pre-approved for. That doesn’t mean you have to spend the max amount but, it gives you a baseline to work from so that you and your agent know what price range to look for homes in.
If you’re still not convinced that you need to get pre-approved vs. pre-qualified here are a couple closing thoughts.
Think about if you find a home you want to make an offer on and your agent finds out there are other offers on the home. If you haven’t been pre-approved yet it takes time to accomplish that step and in the meantime, the seller may elect to accept someone else’s offer. You could opt to submit an offer with your pre-qualification letter but, the odds of a seller selecting your offer over one that has a pre-approval attached are slim to none.
I advise my sellers not to even consider an offer that doesn’t have a pre-approval included with it. If I’m working with a buyer I will not show homes until my client gets pre-approved. Excellent agents who have a high level of expertise do the same. As a buyer when you are ready to buy a home getting pre-approved is one of the first steps. It not only shows sellers you’re serious it also sets you up for a successful purchase.