Pre-Qualification vs. Pre-Approval

When shopping for a new home, you will often hear things from real estate agents that you need to be “pre-approved” or “pre-qualified” for a loan.  While these two terms sound the same and are often confused with one another in their meaning, they mean entirely different things and have different weights for your purchase offer when accompanied by it. 

A pre-qualification for a home loan is a quick and simple process that gives you an idea if you can qualify for a loan or line of credit.  With this, the information you provide the lender with is usually verbal (or just stated) without having to submit documentation.  With a pre-qualification, you have not made an application to the lender yet, but it does show potential sellers that you have contacted a lender and that you are moving forward in the direction of securing a mortgage loan when you need to get one.  While it may not carry as much weight as a pre-approval, it is a sign that you are somewhat starting to be prepared and not looking to waste a seller’s or a real estate agent’s time. 

A pre-approval for a home loan is a written letter from a lender that says you are likely to qualify for a loan up to a certain amount.  There is still a review that is needed of your financial history, including things like your current credit score, assets you currently have, income that includes dividends, pensions, and other investments, as well as your current debt obligations.  It is not a guaranteed offer for a loan, but it can help you in the home-buying process since it shows potential sellers that you have already started the process of obtaining a mortgage and are well on your way to ensuring a successful closing transaction.  A pre-approval is much more detailed than a pre-qualification since you have taken the time to submit actual financial statements such as your W-2, bank statements, tax returns, and other requested items. 

Remember, when shopping for a new home, it is important to make sure that you are eligible and qualified to get a home mortgage loan as well as know what your borrowing capacity is.  It’s best to be prepared and know what your budget is instead of finding your dream property only later to learn it’s out of reach because of your current financial situation.  A prepared borrower makes a great buyer; those are words to live by when shopping for a home in this competitive housing market.