Mortgage pre-qualified vs. pre-approved: What’s the difference?

Household 3 min read

Whats the difference between being pre-qualified and pre-approved for a mortgage? Its huge, and not knowing could cost you the home you want. 

Pre-qualified for a mortgage: What does that mean? 

Many people begin their home buying process by getting pre-qualified for a mortgage. What does pre-qualified mean? Usually, it means you answer a few questions from a mortgage lender about your down payment, income, and debts. Then your loan officer or mortgage broker issues a letter stating that you should be able to afford a home priced at a certain amount. 

The lender may not have pulled your credit and it probably wont have your income documentation, bank statements, or an application from you. When you pre-qualify for a mortgage, its usually a basic exercise in affordability. 

You can even pre-qualify yourself using a mortgage affordability calculator. Just input your debt and gross (before tax) income, and it will generate an amount or a range of home prices that you can likely afford. 

Here is what being pre-qualified for a mortgage does for you: 

  • It tells home sellers and real estate agents that you’re serious enough to have begun the mortgage process.
  • It tells you how much you can probably afford to spend so you dont waste time on unaffordable properties.
  • And it shows you what rates and payments are available and forces you to think about budgeting for a home. 

But mortgage pre-qualification is only a beginning. 

What mortgage pre-qualification doesnt do 

Mortgage pre-qualification is a good beginning, but it comes up short in several ways: 

  • Most lenders do not pull your credit for pre-qualification, so your loan costs and chance of approval are up in the air.
  • You dont submit a loan application and no underwriter sees your information.
  • No one verifies your income, assets, or debts, and lenders often calculate those things differently than you do.
  • There is no commitment to lend.
  • There is no time savings. 
  • And you may not be as desirable as a competing buyer with mortgage pre-approval. 

While mortgage pre-qualification is good, mortgage pre-approval is much better. 

What is mortgage pre-approval? 

Mortgage pre-approval is also called credit approval in the lending industry. When a lender grants you pre-approval, its saying that you, the borrower, have been examined and deemed worthy of credit up to a certain number of dollars. And as long as nothing changes and you choose a property that meets the lenders guidelines, you can close on your home. 

From a sellers point of view, a pre-approved buyer is almost as good as a cash buyer and a lot better than a prequalified buyer. 

To get mortgage pre-approval, you apply for a home loan and submit documents proving your income, assets, and the source of your down payment. The lender will probably use underwriting software to analyze your application. If the software approves you, an underwriter will examine your documents and make sure they support the numbers on your application. 

If the software doesnt approve you, an underwriter will manually underwrite your application. This is where you iron out any questions, credit report errors, and extra requests for documents like divorce decrees or letterof explanation, until the lender either rejects your application or approves you. Once approved, you get your mortgage pre-approval letter. 

What happens after youre pre-approved for a mortgage? 

You can use your mortgage pre-approval letter to make an offer on a property. If the amount you wish to offer is less than your maximum purchase price, you can ask your lender to issue a letter with a lower value on it. 

Once the seller accepts your offer, you may, depending on how much time has passed, have to update the documents in your file. Your lender will want the latest pay stubs, bank statements, and other documents. 

Next, your lender orders a home appraisal. You may also have to pay for an inspection, depending on your loan, purchase agreement, and anything the appraiser uncovers. 

The appraiser sends the appraisal to the lender and an underwriter reviews it to make sure the value is correct and the property is acceptable. You are entitled to a copy of your appraisal. Once the property passes muster, you’ll get a letter issuing final approval. Final approval or full approval means both you and the property are acceptable, and your loan can close if nothing changes. 

Closing on your home 

Note that your final approval will probably have some conditions you must meet to close. These can include bringing a check for your down payment and closing costs, proof of homeowners insurance, and signing your closing documents. The beauty of being pre-approved is that your loan should close much more quickly and without ugly surprises. 

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