If you’re in the market to buy a new home, it’s essential to learn the difference between pre-qualification vs. pre-approval.
Despite a pandemic and the threat of recession, relatively low-interest rates are helping keep an already superheated housing market buzzing. According to Zillow, the real estate market is as competitive as ever, with homes selling after just one week.
They also found that home values in the U.S. continue to “grow at a record pace,” up more than 20% in the past year alone.
So, if you’re planning on a home purchase or refinancing this year, you’ll have to act fast and make your offer stand out in such a competitive market.
One of the best and most important things you can do is get a mortgage pre-approval.
While it’s easy to confuse pre-qualification vs. pre-approval, they are different tools in your homebuying arsenal.
Pre-qualified vs. pre-approved: An overview
Mortgage pre-approval gives you a definitive advantage over potential homebuyers, especially those holding only pre-qualification.
What is mortgage pre-approval?
Mortgage pre-approval is a method lenders use to assess how much someone can borrow to purchase a home.
Mortgage pre-approval involves verifying the information you provide through the underwriting process. This process is when an underwriter evaluates the information you provide to see how much of a mortgage you can receive.
To get pre-approved for a mortgage, borrowers much submit supporting documentation, such as:
- Proof of income or employment verification, such as W2s, tax returns, pay stubs, bank statements, etc.
- Basic personal info, such as your name, address, social security number, etc.
- Additionally, mortgage pre-approval will typically require a review of your credit report, credit score, or credit history.
What is mortgage pre-qualification?
Unlike mortgage pre-approval, pre-qualification isn’t an official endorsement of your ability to purchase a property.
Instead, mortgage pre-qualification is an informal discussion with your lender, explaining your situation, including your employment, income, credit history, and what location (general or specific) you are looking to purchase.
But because you don’t provide any documentation, the lender can’t independently verify the information. In addition, mortgage pre-qualification doesn’t require underwriting.
However, to guarantee you get the best, most accurate estimate of your mortgage loan amount, it’s crucial to ensure the information you provide the lender is as factual as possible.
Why is mortgage pre-approval more important than pre-qualification?
A no-obligation mortgage pre-qualification helps you get a rough idea of how much money you can borrow toward buying a home. Pre-qualifications are based solely on the general information you provide to a mortgage lender.
Often, a credit check isn’t even required to get pre-qualified—making the process even quicker. However, if you forget something or get a few of your numbers wrong, it could mean your pre-qualification doesn’t accurately reflect your financial situation.
In other words, because your lender doesn’t verify pre-qualification information, they may tell you to qualify for less or more than you could actually borrow.
In comparison, mortgage pre-approval is a more involved process.
Mortgage pre-approval typically requires a detailed evaluation and assessment of your financial situation and a review of your credit information. The lender verifies your information, and the resulting loan estimate is more accurate.
At the end of the evaluation, you typically receive the results in a pre-approval letter that can be used as physical proof of your ability to afford the house.
Pre-approvals also come with an additional built-in benefit—they mean more to home sellers.
In competitive markets or situations where a house receives multiple offers, home sellers often overlook pre-qualified buyers, opting for those with pre-approved mortgages— because they are considered more serious buyers.
How long does pre-qualification or pre-approval take?
Pre-qualification and pre-approval typically have different processing timeframes.
Because pre-qualifying doesn’t require borrowers to submit supporting documentation or underwriting, it’s usually quick—often less than a few hours.
However, because mortgage pre-approval requires borrowers to provide financial information, a credit check, and underwriting, it tends to take more time than pre-qualification.
While processing timeframes will vary depending on which lender you choose, it’s safe to plan on receiving your mortgage pre-approval letter within 10-14 business days after you’ve provided the necessary documents.
Which is right for me—pre-qualification or pre-approval?
If you’re a first-time homebuyer, you may find significant benefits to getting pre-qualified before doing anything else.
Pre-qualification can help you establish a budget and provide a wealth of information about the mortgage and home buying process you might not otherwise have access to at this point.
Mortgage pre-qualification can also benefit repeat home buyers or homeowners interested in refinancing their current mortgage by providing a quick snapshot of their financing options. (This trick can be helpful whether you are interested in a conventional refinance or one through FHA streamlining / VA loan Irrrl).
But when it comes time to bid on a house, mortgage pre-approval is the clear winner.
When you start house hunting, don’t be surprised to see listings that say “offers will only be accepted from buyers with mortgage pre-approval.”
Pre-qualification vs. pre-approval: The bottom line
Mortgage pre-qualification can be a significant first step in your mortgage journey.
It can give you a rough idea of your home buying price range based on your current finances. It’s also quick, requires minimal effort, and no obligation or fee is attached.
Armed with pre-qualification information, you are in a better position to decide whether you want to move forward with purchasing a home.
Alternately, you might decide it’s more beneficial to take some time and save a little more down payment or improve your credit score—both things that can affect mortgage approval and interest rates.
Mortgage pre-approval gives a verified, more accurate understanding of what you can afford while providing the evidence you need to let home sellers know you’re a serious buyer who can successfully complete the purchase.
Get in touch with Assist Home Loans to get pre-approved
Getting pre-approved for a mortgage through Assist Home Loans can help ensure you’re fully prepared to make a successful purchase.
Both pre-qualification and the pre-approval process help you get organized and let you know what you need to do to make the best possible offer on your dream home.
If you have questions about mortgage pre-approval, pre-qualification, or any other part of the mortgage process, contact the licensed loan officers at Assist Home Loans, or start your application online today.
Photo by ANTONI SHKRABA