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Pre-Qualifying vs. Pre-Approval
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What Is the Difference Between Pre-qualified and Pre-approved?

According to generally accepted industry definitions, a pre-qualification letter is simply a cursory review of your financial situation while a pre-approval letter shows that the lender has made a thorough analysis of your income, assets and credit and has conditionally approved you for a specified loan amount. The pre-qualification process is quicker than the pre-approval process and is often the first step in getting a pre-approval, as it can be issued while information and documentation is being submitted and verified for the pre-approval.

A pre-qualification is normally issued by a loan officer, who, after interviewing you (often informally over the phone) and checking your credit rating, determines the estimated dollar value of a loan for which you can be approved. However, loan officers do not make the final approval, so a pre-qualification is not a commitment to lend, it's just an opinion, since the lender does not verify any information and is not bound to make a loan when you are ready to buy. There is no guarantee you will qualify for the amount you for which have been pre-qualified. After the loan officer determines that you pre-qualify, he/she then issues you a pre-qualification letter. This pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that you are qualified to purchase the property on which you are making an offer based on information you provided the lender and subject to verification.

Pre-approval is a more formal step above pre-qualification. Pre-approval is based on documented and verified information and involves verifying your credit, down payment, employment history, your assets and liabilities, cash on hand, etc. Your loan application is submitted to an underwriter and a decision is made regarding your loan application. If your loan is pre-approved, you are then issued a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a property. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having cash in the bank to pay for the property!

Why pre-qualify? Because you'll have to make a loan application sooner or later, unless you plan to pay cash, and pre-qualifying is just taking care of one step of that process. Pre-qualifying speeds up the mortgage process for you, since it takes time to run reports and verify information for the pre-approval. You also save time by only looking at the homes that you are estimated to be able to afford while you wait for the pre-approval.

Why get a pre-approval? A pre-approval from your lender shows that you have a solid credit history and that you are qualified for a mortgage loan of a specified size. In a competitive market, a pre-approval letter can provide greater negotiating clout with the seller, as well as provide assurance that your offer will have priority above those who are not pre-approved. The greatest benefit to having a pre-approval letter is that it takes the stress out of shopping for a property. You won’t be disappointed by choosing a home and finding out later that a bank won't finance your decision. You'll be able to concentrate upon finding your dream property, without the worry of wondering if you've met the lender's financial requirements.

Note: The above discussion is based on the generally accepted industry definitions of "pre-qualification" and "pre-approval. However, in actual use, the definitions of each term are somewhat flexible -- the meaning of "pre-approval" and "pre-qualification" varies from place to place, lender to lender, and who you ask. Neither a "pre-approval" nor a "pre-qualification" are seen as absolute loan commitments. A final approval requires a satisfactory property appraisal and title review and no change in financial condition, whereupon a loan commitment allocates funds for the loan.

Getting pre-qualified and/or pre-approved by a reputable mortgage company is the first major step in buying a property, and should be done before you actually start your property search, as it will tell (or confirm to) you what price range in which to be looking for property.

Click Here to get Pre-Approved

What Information Will Be Needed For the Pre-Approval Process?

Generally, the lender will want you to complete a standard residential loan application or, you just may be asked to provide the following documentation. Also, the lender will order a credit report to determine if there are any unusual or derogatory items in your credit history which may require additional explanation. The following document items may be needed from you in order to complete the Pre-Approval Process:

When the time comes to negotiate for the home of your choice, we (as your agent) will need a copy of your lender provided pre-approval certificate.

Sources: U of Cal. Office of President; The (Re)Finance Center

Click here for our Real Estate Resources Library - Mortgages section.

Click here to request help from a mortgage professional to obtain a Pre-Approval.


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