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What is pre-qualified vs. pre-approved? [Video]

Tim Lucas
The Mortgage Reports editor

Before you buy your first home, should you apply for mortgage pre-approval? Or just pre-qualify for a home loan?

First of all, it’s important to know the difference.

Pre-qualification and pre-approval definitions

  • For mortgage pre-qualification, you provide your income, asset and credit rating information, and lenders estimate the loan amount you can afford
  • With mortgage pre-approval, you complete a full mortgage loan application and supply income and asset documentation. Underwriters certify this documentation and issue a conditional loan approval
Start your pre-qualification or pre-approval here. (Nov 17th, 2018)

Pre-qualification pros and cons

Pros:

A pre-qualification is fast, and you don’t have to supply documentation. A lender can pre-qualify you over the phone or online in 5 minutes.

If you have good credit, a W-2 salary, and documentable assets with no recent large deposits, a pre-qualification may be accurate enough.

Cons:

Because a pre-qualification is based on verbal information, it’s not as “solid” as a pre-approval.

You may be self-employed. Or you may earn a bonus, differential, second job or overtime income. You tell the lender you make $75,000 per year. But perhaps the lender can’t count all income towards the approval. For instance:

  • You can only count income after write-offs if you’re self-employed
  • You typically need two years’ history of bonus, overtime, second job, and differential income to use it for mortgage qualification

Depending on the way in which you earn your income, the lender may only count $50,000 of the $75,000 as “qualifying.” That’s a big difference when applying for a mortgage.

Lenders don’t always check your credit before issuing a pre-qualification letter. Inaccurate information on your credit report or a too low FICO score could stop your mortgage approval in its tracks.

In short, a pre-qualification is not as reliable as a pre-approval. You could find yourself half-way through a home purchase and unable to secure the financing needed to close the deal.

For this reason, many home sellers and real estate agents do not take buyers with just a prequalification letter seriously. Your offer will not receive the same consideration as one from a pre-approved buyer.

Pre-approval pros and cons

Pros:

A pre-approval gives you more confidence as a serious buyer. The lender collects your pay stubs, W2s, and bank statements. To obtain a pre-approval, the lender also pulls your credit report. Human underwriters verify and certify your income and assets. The end result is a full mortgage approval, minus the property.

It’s also much faster to be fully approved after you find a home.

Cons:

This process takes longer, and you have to submit more documentation. However, you’ll have to do this work eventually to complete your home purchase. Doing it in advance allows you to proceed with more confidence, and makes the entire escrow go more smoothly.

How do I request a pre-qualification or pre-approval?

Just about any lender will provide a pre-qualification or pre-approval for little or no cost. You can be connected with reputable lenders that are licensed in your state by clicking below.

Start your mortgage approval request here. (Nov 17th, 2018)

 

Check out our first article in this series: “What’s the first step to buying a home?”