In our current U.S. economy, there are only a select few homebuyers that are paying cash and don’t need a loan to purchase a home. If you fall into that category, congratulations, none of this applies to you. For the vast majority, however, mortgage financing is a fundamental part of the home buying process. With that in mind, understanding the difference between a mortgage pre-approval and a mortgage pre-qualification is essential.
At first glance, both terms look and sound interchangeable, and are often confused with one another. The consideration that’s given to one versus the other, however, is substantially different.
Although pre-approvals and pre-qualifications will both involve a credit pull, generally a credit pull is where the documentation ends with pre-qualification letters. The other information used to pre-qualify a buyer (income, down payment, etc.) is typically provided verbally, often over the phone.
After a potential buyer’s credit is pulled, the loan officer will estimate the mortgage amount for which the buyer can qualify, and voila! You’re pre-qualified! The pre-qualification letter will (or at least should) include various disclaimers. The disclaimers will typically indicate the need for appropriate documentation to support the buyer’s income and assets.
On the other hand, a pre-approval letter involves verification of the information verbally obtained. This of course means more time and effort, which is exactly why a pre-approval letter carries more weight than a pre-qualification letter. A pre-approval allows you to shop for your new home with more certainly and less anxiety.
Other important reasons to get a pre-approval letter:
- You’ll know exactly how much home you qualify to buy.
- In a competitive market, not only do sellers prefer to negotiate with pre-approved buyers, most bank-owned properties require a pre-approval letter when an offer is submitted.
- Your REALTOR® will be inclined to work harder on your behalf.
Regardless of which side of the transaction you’re on, it’s important for you to know the difference between a pre-qualification and a pre-approval.