One of the first things many prospective homebuyers are told is to be “serious” about buying a home, you need to be pre-approved for a mortgage. Or maybe it was pre-qualified? Let the confusion begin!

Are Mortgage Pre-Qualification and Pre-Approval the same?

Before we begin, it may be helpful to understand there is no legal definition for pre-approval or pre-qualification. These terms can vary lender to lender. Both terms describe a process where a lender examines your financial status and makes a preliminary decision on whether you can be extended credit for a loan.

In general, pre-approval is understood to be a more thorough review of a person’s finances compared with pre-qualification. Pre-approval is the closest you can get to obtaining a mortgage prior to finding a home to purchase.

Becoming pre-qualified is seen as a more preliminary step to homebuying. Pre-qualification can often be completed by a lender in a few minutes. The lender will ask prospective homebuyers to self-report basic financial information, including income, debts, and total assets.

Lenders will also do a “soft inquiry” on your credit during pre-qualification, which does not impact your credit score. This allows them to check your credit but isn’t as thorough as a full review of your credit history, which requires a hard inquiry.

Pre-qualification can be a beneficial step for many homebuyers. You will receive an approximate estimate of the size of a loan you might qualify for, which can assist you in focusing your home search and planning your mortgage budget.

You can also review the different mortgage options available and use interest rate estimates to budget a potential mortgage payment. All of this helps to get your finances in order when buying a home.

Why is mortgage pre-approval important?

When you are prepared to purchase a home, pre-approvals generally carry more weight with real estate agents and sellers when reviewing offers when compared to pre-qualifications. Homebuyers that have undergone pre-approval can be viewed by sellers as more serious and reliable than a buyer who is merely pre-qualified.

Let’s take a closer look at the process of mortgage pre-approval.

How do you get mortgage pre-approval?

Mortgage pre-approval is a more thorough review of your financial situation. A lender will ask for a number of documents to determine creditworthiness and the amount of loan you would be pre-approved for.

You may need to provide:

• Government-issued IDs like passports or driver’s licenses.
• Income verification via several years of W-2s, 1099s, tax returns, or pay stubs.
• Employment verification, which can be determined with W-2s unless you are self-employed.
• Bank statements for the past 2-3 months to verify your financial information and ability to afford a down payment.

Lenders will also make a “hard inquiry” on your credit. The hard inquiry is a full review of your credit history and credit reports. Hard inquiries temporarily affect your credit score, usually lowering it by a few points. You’ll want to try and limit the number of hard inquiries made in a short period otherwise you can make it more difficult to be approved for a mortgage or other debt like credit cards.

Using this data, lenders decide whether to extend credit and the amount of mortgage debt that may be offered. Pre-approvals typically take time to complete, sometimes as much as two weeks. Mortgage pre-approval is based on several factors, including:

• Debt-to-income ratio, or DTI
• Credit score
• Down payment amount
• Income
• Employment history

Remember, the mortgage amount you are pre-approved for is an estimate of the maximum amount a lender may offer you, not a guarantee. It also may be more than you are comfortable budgeting. Always do your homework on what a comfortable mortgage payment could be based on your lifestyle and budget.

What happens when I am pre-approved for a mortgage?

Once you are pre-approved, you will receive a pre-approval letter from a lender stating the amount of money it is tentatively willing to lend, up to a certain amount. The letter will also specify conditions tied to the pre-approval, like a required percentage for the down payment or the property's valuation, that must be fulfilled.

When you submit an offer on a home, you’ll send a copy of this letter to sellers. The letter communicates your access to financing and gives confidence to sellers you can close the deal. Real estate agents can be a helpful resource when creating and framing offers with pre-approval letters.

There are important things to consider when getting pre-approved for a mortgage:

Validity period: Pre-approvals expire after a set time frame, usually between 60-90 days. Outside of that timeframe, you’ll have to begin the process again. Be sure to read the fine print on your pre-approval and budget your time accordingly.

Avoid large financial changes: Pre-approvals are based on assumptions about your debt load and income. Large purchases, like a car or changes in your employment history could void pre-approvals.

Not a guarantee: Pre-approvals are not a guarantee. You’ll need a home under contract to finalize all the figures related to a mortgage.

Do I need to be pre-qualified or pre-approved before house hunting?

No, but it’s probably a good idea.

To be clear, there’s no requirement to be pre-approved or pre-qualified to begin searching for a home. In fact, you can go as far as making an offer without ever speaking to a mortgage professional. The problem is sellers may not take your offer seriously if you’ve made no effort to secure financing.

In a competitive market where multiple offers exist on a home you’ll be at a significant disadvantage against buyers who already have pre-approval letters. Speaking with a mortgage professional early in the homebuying process can save time and headaches later on. You don’t want to lose out on your dream home because the financing wasn’t secure.

Why get pre-qualified vs. full pre-approval?

If pre-approval is more valuable in the homebuying process, why get pre-qualified at all? There are a number of reasons you might opt for pre-qualification before getting pre-approved.

For some, it may just be too early in the process. Getting pre-qualified can help you begin to make educated guesses on how to budget for a home. Pre-qualification also opens your relationship with a mortgage professional. If you are a person who likes to shop around and compare offers, this can be a great way to start building those relationships.

Pre-qualification is also a great time to find any issues with your credit. If for some reason you are denied credit during pre-qualification you are legally required to receive an “adverse action notice.”

Under the Equal Credit Opportunity Act (ECOA) and Fair Credit Reporting Act (FCRA), any organization that informs a consumer they are denied credit on the basis of their credit report is required to issue an adverse action notice. The notice outlines the specific reasons for denial, outlines the relevant issues in your credit report, and provides details on how to dispute the information. The earlier you spot issues the more time you’ll have to improve your credit and correct inaccuracies.

Pre-qualification and pre-approval are both excellent tools to help prospective homebuyers. Both can play an important role depending on where you are in the journey towards homeownership. Now that you understand the differences, you can make the right call for you.

The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.