Pre-Qualified vs Pre-Approved: What’s the Difference?

Pre-qualification and pre-approval are two terms you may hear used interchangeably when shopping for a mortgage, but they are actually two optional steps you can take to start the loan approval process. A mortgage pre-qualification is usually a much shorter process that requires you to honestly report your own financial information, while a mortgage pre-approval typically requires you to submit more documentation like W-2s to verify your financials — making it a lengthier process.

Neither pre-qualification nor pre-approval will guarantee you a loan, but getting pre-qualified or pre-approved before you start searching for a home can help you more easily find a home you love within your budget. A pre-approval may also make the process of completing a full loan application much easier and faster, because you’ll already have submitted a lot of necessary information to the lender.

While both pre-qualification and pre-approval from a lender help identify your price range, a pre-approval letter can signal to your real estate agent and sellers that you’re serious about buying a home. Agents often require a pre-approval letter, because it is a strong indication that you are a qualified buyer and can make a competitive offer.

What does pre-qualified mean?

Pre-qualification means you may satisfy a lender’s general criteria for a mortgage, based on your self-reported financial information like income, assets, credit and debt. Pre-qualification can be as simple as a short phone conversation with a lender. Afterward, the lender may or may not provide you with a letter detailing the types of loans you may qualify for and the loan amount you may be able to borrow.

Pre-qualification is just a starting point. According to a Zillow survey, about a quarter of prospective buyers who have not yet started working with an agent reported getting pre-qualified (27%).

If you’re unsure where to begin in your home buying journey, or aren’t even sure what homes you can afford, start the pre-qualification process to learn more about your loan eligibility.

Keep in mind, a mortgage pre-qualification is only as accurate as the information you provide the lender. That’s why those who are ready to buy in the near future often go straight to pre-approval, which is a more comprehensive verification process.

What does pre-approved mean?

A mortgage pre-approval means you have a conditional commitment from a lender to approve you for a loan as long as you continue to meet their conditions by the time you close on the home. You’ll need to provide the lender with documents like bank statements, W2s and pay stubs. The lender will also run a credit check, which will show as a hard inquiry on your credit report.

Once pre-approved, you’ll receive a pre-approval letter detailing the loan amount, types of loan programs you may qualify for (e.g., conventional, FHA, VA), an estimated interest rate and annual percentage rate. Assuming you continue to meet the lender’s financial loan qualifications during the underwriting process, your lender will be able to issue a final loan approval. You will still have to complete a loan application before being fully approved for a specific loan program.

A pre-approval letter accompanying your purchase offer suggests to the seller that if they were to accept your offer, financing is more likely to go through than without one. Your offer becomes more compelling. According to Zillow’s Consumer Housing Trends Report 2022, 85% of sellers say that they prefer to accept an offer from a buyer that is pre-approved.

Difference between pre-approved and pre-qualified

A pre-qualification can help you prepare to take the next steps towards buying a home and give you a sense of a reasonable budget to stay within when shopping for home. A pre-approval gives you a more concrete understanding of your budget, so you can start making offers and can signal to the seller that you are a serious buyer. Here are a few more key comparisons between pre-approval and pre-qualification.

FAQs about pre-qualification vs pre-approval

Why should I get pre-qualified vs pre-approved?

Getting pre-qualified for a mortgage can be a good starting point if you’re a first-time home buyer or if you’re in the very early stages of considering a home purchase. Most pre-qualifications don’t require a hard credit inquiry, so your credit score won’t take a hit if you decide to press pause on buying. And when you decide to move forward with a pre-approval, you’ll already have a good idea of which lender you’ll want to work with.

Either way, if you choose to get pre-qualified vs pre-approved or vice versa, you’ll still need to have an offer accepted, a loan application completed and a purchase contract in place before your lender can fully underwrite and approve your loan.

Why wait to get pre-approved?

Buyers may want to get pre-qualified to get a ballpark for their budget and get pre-approved when they’re ready to seriously shop and make offers. This is because pre-approval letters only last for an average of 45 days. After this period, a new pre-approval is typically required since your financial circumstances could change. For example, you may make new purchases that increase your debt and tighten your house affordability, or you may get a new credit card that causes a hard inquiry on your credit report and lowers your credit score.

With each new pre-approval, a hard inquiry is made on your credit report which can affect your credit score over time. Keep in mind that during that 45 day period (from the date of your first mortgage credit check), all hard inquiries are consolidated and won’t individually impact your credit. If your pre-approval expires and you’re still actively shopping, reach out to your lender to discuss timing for your next pre-approval.

Are pre-qualification and pre-approval the same thing?

A mortgage pre-approval is not the same as a pre-qualification, but they serve many similar purposes. Both help you estimate the loan amount you’re likely to qualify for. Both can help show real estate agents and sellers you’re a serious buyer.

Which is better pre-approval or pre-qualification?

A pre-approval letter typically carries more weight than a pre-qualification, since the pre-approval is a conditional commitment from a lender to approve your loan. If you’re uncertain which is the best option for you, your moving timeline can be a good indicator of whether you should choose a pre-approval or pre-qualification. If you’re fully committed to buying a home, starting the pre-approval process first might be the right option for you. If you’re curious about whether or not you qualify for a loan and how much you may be eligible to borrow, mortgage pre-qualification will provide you with helpful information you can use to find a home within your budget.

Do I have to use all the money I’m pre-approved to borrow?

You don’t have to search for homes at your maximum pre-approved amount, but it is a good idea to search for homes that don’t exceed that budget. Take into account your own monthly spending habits and priorities when deciding how much of your pre-approved amount to borrow.

Do I need a pre-qualification letter to look at houses or work with an agent?

You don’t need to be pre-qualified to start looking at houses, but many real estate agents like to see at least a pre-qualification letter before committing a lot of time and effort to showing you homes. Also, getting pre-qualified can help solidify your budget and prevent you from touring properties that may end up being above your price range.

Do I need a pre-approval letter to make an offer?

You don’t need a pre-approval letter to start making offers, but your offer will be more desirable to sellers if it comes alongside a pre-approval letter — especially in a competitive market.

Article shared from Zillow.com