Finances

Mortgage pre-qualification vs. pre-approval: understand the difference

This article breaks down the differences between mortgage pre-qualification and pre-approval, giving you a better understanding of each process and how they differ. Read on for more.

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Understand mortgage pre-qualification vs. pre-approval. Source: Adobe Stock

Do you want to buy a home but feel uncertain about the loan process? Understanding the difference between mortgage pre-qualification vs. pre-approval can make your journey easier.

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This post will discuss each of these steps and how they can help you reach your homeownership goal. Then let’s get started!

What is mortgage pre-qualification?

Pre-qualification is an early step in the home buying process in which you can estimate how much a lender will be willing to lend you.

Usually, no credit evaluation is involved, which is great for first-time buyers. As a result, some lenders will perform a soft credit check, which does not lower your credit score points.

Furthermore, it is common for lenders to have an online platform to reach their potential customers, turning pre-qualification into an easy and quick process.

Also, it’s important to know that mortgage lenders offer a pre-qualification as the first contact with their products.

It doesn’t necessarily reflect the loan amount available according to your profile.

Benefits

Pre-qualifying is the easier and quicker way to estimate how much you can borrow to get your dream home. It often takes a few hours and is an online process!

Mostly, the prequalification process won’t require a credit check. But some lenders will perform a soft inquiry to provide a loan estimate.

The process itself is great to know the different mortgage options your lender provides and discover which one fits your necessities.

Indeed it’s an easy process, but don’t you want to know what is necessary to apply? Continue to discover!

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Documents

Normally lenders don’t ask for documents for pre-qualification. But in general, you must provide personal and financial information, varying from lender to lender, what is needed.

As said, they’ll run a soft credit check before estimating how much you can borrow. Keep in mind that there won’t be any credit damage in this process.

What is mortgage pre-approval?

When comparing pre-qualification vs. pre-approval, know that getting pre-approved requires a longer and more detailed process.

It involves not only the information provided by the borrower but a closer look into the borrower’s financial situation. In fact, it is a step forward in the homeownership journey.

When you start a pre-approval process, the lender will submit a hard credit check and require additional documentation that proves your financial status.

If pre-approved, lenders will send a pre-approval letter that will the specific amount available to you. Next, you can find a real estate agent to take your offer.

However, the pre-approval letter won’t ensure the mortgage approval. It takes more than that! Pre-approval is not a commitment to lend.

After following the previous steps and finding a house that fits your pre-approved credit, it’ll still have to go through an appraisal to qualify.

Furthermore, some processes and details vary from lender to lender, and you can always consult with the lender you submit a pre-qualification to learn more.

Benefits

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Keep reading to learn what mortgage pre-approval is! Source: Adobe Stock

The preapproval will give you a much more conclusive idea of how much you can borrow. It will show you a complete estimate, including taxes, monthly payments, and interest rates.

Also, because of its credit checking and proven financial situation, a pre-approval letter carries a weight that can give you some preference when it’s time to meet a real estate agent.

With that in mind, sellers will take your offers more seriously with a pre-approval letter. And, for most of them, it’s a requirement. Indeed, great benefits to catch your dream home!

Documents

You need to know that pre-approval is a more advanced step to getting a mortgage loan. So, the lender will do a hard credit check, and you’ll also have to prove your given information.

The documentation required for pre-approval may differ from lender to lender. But the most commonly requested may include pay stubs, W-2s, tax returns, and Social Security cards.

What are the main differences between pre-qualification and pre-approval?

After considering getting a mortgage loan, you might be wondering where to start. So, it’s when pre-qualification vs. pre-approval comes up!

You should consider both as a way to achieve homeownership, but remember: they have different weights.

Briefly, pre-qualification is a mechanism that allows you to have a quick first contact with the available loan amount. There is no hard inquiry, and it can be completed online.

As you decide to go beyond, you may start a pre-approval process. For that, you must prove your information by providing a list of documents. Also, lenders will run a hard credit check.

At this point, getting preapproved will give you a more accurate indication of the mortgage you’re applying for.

Also, if you have a pre-approval letter, you’ll grant competitive advantages with estate agencies. Continue reading to see below all their main characteristics!

Pre-qualification

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Learn the main differences between pre-qualification vs. pre-approval. Source: Adobe Stock
  • It gives you an estimate of how much you might be able to borrow;
  • The lender makes no hard inquiry. Sometimes, not even a soft credit check is needed;
  • It is based on the information given by the borrower and can commonly be made online and provide a result in a manner of minutes.

Pre-approval

  • Regardless of not being a guarantee of closing, a preapproval gives a definitive idea of your creditworthiness;
  • It involves a hard credit check, as it also demands a sort of documents such as pay stubs and W-2 statements;
  • Pre-approval is a more complex process! Sometimes it takes ten days to receive a lender’s decision after giving all the documents.

Mortgage pre-qualification vs. pre-approval: which one should you choose?

After learning more about their main characteristics, which one should you take? Well, it depends on your needs. First, consider the step of the homebuying journey you are in.

If you’re just starting and need to know how much you can borrow in a more informal evaluation, you should take a pre-qualification.

Nevertheless, you should consider a complete evaluation after having an initial idea of the values in question. That’s when a pre-approval might be the case.

You must consider that after pre-approval, the lender will give you a complete offer, including estimated closing costs, monthly payments, rates, and how much you’ll able to borrow.

Until now, you’ve seen the difference between both pre-qualification and pre-approval. To dive further into your homeownership journey, keep reading our article about mortgage insurance!

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About the author  /  Luis Felipe Regueira

I needed to learn about finances when I was in culinary school and wanted to save money to start my own business. So I haven't stopped because I believe studying and writing about the topic can help more people achieve their goals. Currently, I write about finances and run a small coffee shop.

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