Pre-Qualified vs. Preapproved: What’s the Difference?

A very common question that we get asked as our clients get ready to buy a home, is what is the difference between pre-qualification and pre-approval? Are they the same? Is one better that the other?

The truth is they sound very similar, and in fact they are similar in many ways. But the differences between the two are important and consequential to the overall readiness of a prospective buyer with regard to the mortgage process. Let’s explore the two a little deeper, see how they differ and examine the role they play in home buying journey.

What is a mortgage pre-qualification?

Pre-qualifying for a mortgage is generally considered to be the first step in the home buying journey. It aims to calculate an estimation of how much a buyer can probably afford, based on self-declared, honor-system, best-faith estimation of key determinants like credit rating, income, debt load etc. While pre-qualifying, the lender attempts to gather general information which describes your credit history, current income and assets, debt (if any), typically without pulling credit and/or requiring hard documentation to prove those assertions. Certain aspects of the pre-qualification process may vary by lender. Some lenders may perform a soft pull with permission.

So once the prospective buyer has shared this ‘unverified, best-knowledge’ information, a preliminary scan of the prospective buyer’s financial health is performed, and the lender then provides a good-faith estimation of how much the loan seeker may be able to borrow.

So pre-qualification can be a very quick process – with many lenders providing online utilities that facilitate easy information gathering for this preliminary assumptive step. Many lenders even offer the convenience of pre-qualifying buyers over the phone. This convenience grows in significance in times when social distancing requirements due to COVID-19 are impacting and at times limiting opportunities for face-to-face engagements.

What is a mortgage pre-approval?

A mortgage preapproval takes the preparation process to the next level, and moves the buyer deeper and further into the homebuying process. It is not as immediate as a pre-qualification, as this process requires the collection of documents necessary to verify the financial health  of a prospective buyer. Tax returns, bank statements, statement of monthly expenses, employment verification, asset verification, credit pulls and many other documents may be required to establish identity, eligibility, and overall financial fitness and stability of a prospective buyer. Additional documents and steps may be needed based on factors like citizenship, whether or not the borrower already owns real estate (a copy of mortgage statement and home insurance policy may be required etc.)

There are a few ways to show proof of stability to the lender, usually providing information in the form of W-2s, a current pay stub, a summary of your assets, and your total monthly expenses. Some borrowers already own real estate, and a copy of a mortgage statement and home insurance policy might be requested.

While the pre-approval process takes longer, has more steps and requirements, being pre-approved culminates in the ability of a lender to issue a Pre-Approval Letter. This letter is equal to Buyer Confidence. It provides a statement from a financial institution that a prospective buyer can show to sellers and real estate agents when making offers on homes.

One way to look at the difference between Pre-Qualification and Pre-Approval is to understand that Pre-Qualification is quick, easy but is assumptive, good-faith (unverified) estimation of financial fitness and buying power. Whereas Pre-Approval infers greater confidence with regard to how much a prospective can truly potentially afford, because less is assumed, as many of the determinants have been verified through the document collection process and credit checks executed. Note that a pre-approval offer from a lender is NOT a guarantee of funding, but it shows that a buyer is serious and may provide the buyer more leverage in negotiating in competitive markets, given that their financial information is not simply assumed but has been collected and reviewed by a lender.