Home Loans : Pre-Qualification vs Pre-Approval
October 26, 2023
Are you planning a home purchase utilizing financing? If so, you may need to provide a pre-approval letter when home shopping. It’s important to note that while the terms pre-qualification and pre-approval sound similar, there’s a big difference between the two.
What’s the Difference?
The pre-qualification process is the first step before considering shopping for a home or applying for a home loan. A pre-qualification letter is a preliminary assessment of your financial situation based on the information you provide to a lender. It usually doesn’t involve a deep dive into your financial history or a credit check. It provides an estimate of how much you may be able to borrow and can help you understand your potential budget when house hunting.
In contrast, getting pre-approved for a mortgage loan is a more stringent process than pre-qualification and requires verification of the information provided in a mortgage loan application. A pre-approval letter states the maximum amount you are approved to borrow when purchasing a home and the applicable terms and conditions. A pre-approval letter is generally valid for 30 – 60 days.
The advantage of completing both steps—pre-qualification and pre-approval—before looking for a home is that it offers an idea of how much a borrower has to spend, preventing wasted time looking at properties that are too expensive. Pre-approval also allows borrowers to close on a home more quickly by proving to the seller that they have the resources to make the purchase. And if a seller’s getting multiple bids, having a mortgage pre-approval can help you stand out from the rest.
Although they sound the same, pre-qualified and pre-approved have different meanings. Both are initial steps in the mortgage process, with pre-qualified being an indicator of the size of the mortgage you’ll likely be approved for, while pre-approved is a commitment with conditions from a lender that you will receive approval for a mortgage. Knowing the difference will help you move through the mortgage process much smoother and get you from house hunter to homeowner.