What is a pre-approval versus a pre-qualification letter?

written by Jennifer Chiongbian
MORTGAGE EXPERT
12 · 11 · 20
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The overall process of buying a home can seem intimidating, exhausting, and hopelessly expensive. Many first-time homebuyers turn to a mortgage to help make it more affordable.

When looking to take out a mortgage, the terms pre-qualification and pre-approval are often used interchangeably. However, these are two distinct steps during the mortgage application process, both with key differences.

A pre-qualification letter will estimate how much you’ll likely be able to borrow. It’s more of an informal process, that is based on an unverified evaluation of your financials. 

On the other hand, a pre-approval letter carries much more weight. It is a tentative commitment for a certain loan amount and interest rate. This process requires more documentation that is then vetted by the lender.

Here’s a more in-depth look at each. 

Pre-Qualification 

A pre-qualification letter will give you a ballpark number of how much you can borrow.     

The Process

When getting pre-qualified, you will provide the lender with a synopsis of your financial standing, including credit, outstanding debt, and your annual income amount. Keep in mind, you will not be required to provide documentation, but rather speak to the topics listed above.

Based on that information, the lender will then use consumer-backed data to estimate how much you could possibly get approved for.

Overall, it’s simple and easy to do. You can get pre-qualified over the phone, in person, or online.

What You’ll Need to Describe

This may vary from lender-to-lender, but here is a general idea of what you’ll be asked to report on. 

· Basic income and asset information

· Credit score and rating

· Current debt

· Expected down payment amount

· Desired mortgage amount

When to Get Pre-Qualified 

Getting pre-qualified is a helpful first step that will introduce you to the overall requirements regarding a mortgage and your readiness to apply for one. 

It’s a good opportunity to discuss the various mortgage options with a lender and ask any questions you may have.

This is a learning experience that will better prepare you when it’s officially time to start the homebuying process.

 The Downside

A pre-qualification is not an official promise from the bank or lender.

It’s only based on the overview of the information provided. The lender will later take a closer look at your financial health and history during the pre-approval stage. This means the loan amount could change depending on any discrepancies found.   

Pre-Approval

A pre-approval letter gives a more definitive answer regarding your creditworthiness and spending power.

The Process

 When getting pre-approved, the lender will take a more hands-on approach. A thorough credit and financial background check will be performed and analyzed. 

You must fill out an application and provide any documentation required by the lender. 

You will then receive a pre-approval letter stating the specific loan amount, loan type, interest rate, and any additional terms. 

At this point, most lenders will allow you to either lock in the interest rate or pay an application fee. You can always choose to wait until the mortgage loan is officially approved before committing.  

If you end up locking in and the interest rates fall, typically the lender will allow you to buy down the rate for a few hundred dollars. 

Documentation Required and What The Lender Will Analyze

· Verification of income and employment

· Copies of pay stubs and bank statements

· Investment and retirement account statements

· Summary of your assets

· Total monthly expenses and outstanding debt

· Credit report

· Tax documents

· Proof of down payment

 When to Get Pre-Approved

It’s important to get pre-approved before you start looking at homes and negotiating with sellers. 

While it’s still not an official guarantee, it gives a more detailed understanding of what you can afford. Additionally, a pre-approved buyer will have an advantage in a competitive housing market. Sellers will view you as a serious contender with fewer financial contingencies. It’s a win, win for all parties involved. 

The Downside

There really aren’t any downsides to getting pre-approved. The only negative is the process involved. Lenders will extensively check your entire financial history. It can be both time-consuming and tedious, but worth it in the end.

Which is better?

A pre-approval will provide you with more insight as to how the official mortgage application will go.

 While a pre-qualification will indicate what price range you can afford, a pre-approval letter will do that and more. It will give you leverage over other buyers and allow you to submit an offer with confidence.

Taking the time to prepare for a major purchase like this is essential. A pre-approval will equip you with the necessary tools to make the process easier and more straight-forward.

Author

Jennifer Chiongbian

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