Getting pre-qualified or pre-approved for a mortgage can be two important steps when you want to buy a home. You’ll know approximately how much you can borrow, allowing you to maximize your budget for your purchase. You may also receive a letter from your lender indicating that you have been conditionally approved for a loan, which can be important when submitting an offer in a competitive market. You’ll also have a better idea of the range of interest rates you can get.
Read on as we explain what these two similar-sounding terms mean to potential homebuyers.
learn more: How to buy a house, step by step guide.
Prequalification vs. Preapproval: Key Differences for Home Buyers
Understanding the difference between mortgage pre-qualification and pre-approval can be confusing because some lenders don’t use these terms in a consistent way. But the most important thing to remember is that there are two ways to get an estimate from a lender.
We define mortgage pre-qualification as the simpler process and mortgage pre-approval as the more complex process because this is consistent with the process used by many lenders.
- Mortgage pre-qualification (less complex): One process requires you to estimate some basic information, such as your income, debt and credit score. In seconds or minutes, you can find out how much you can borrow based on what you share.
- Mortgage pre-approval (more complex): There is also a process that may require you to complete an application, submit copies of documents, and allow the lender to check your credit. It may take a few hours or days to get results, but the lender can show you a more accurate maximum loan amount and estimated terms based on current mortgage rates.
Some lenders differentiate between the two by referring to the more complex process as verified approval. However, going back to more potential confusion, they may refer to the simpler process as pre-qualification or pre-approval.
Based on our interpretation of the above terms, here are some things to be aware of when seeking pre-qualification or pre-approval for a mortgage loan.
| prequalification | pre-approved |
| An estimate of how much you can borrow based on self-reported information. | Estimate loan amount and terms based on verified documentation. |
| A credit check leading to a soft inquiry may be involved. | This can result in credit checks and hard inquiries on all three of your credit reports. |
| This can be a good place to start when you’re first considering buying a home. | Very helpful before opening houses and making offers. |
When to Get Pre-Qualified and Pre-Approved
If you’re considering buying a home and want to know how much you can borrow, prequalification can be a good first step. You can use the results to set goals while saving for down payments and closing costs, and set filters when searching for homes online.
learn more: How much should the down payment for a house be?
Once you get serious about searching for a home, getting pre-approved for a mortgage may be a better option. Lenders will evaluate many of the same information and documents they use to approve your mortgage, which can give you greater confidence that you’ll be approved for a mortgage on the same terms. If you don’t get pre-approved today, you can still learn what steps you may need to take to increase your chances of being pre-approved in the future.
However, even pre-approval does not guarantee that you will ultimately be approved. Even if your finances and credit remain the same or improve, a lender may not approve a mortgage based on other circumstances, such as the condition of the home, the appraisal, and whether you can obtain homeowners insurance.
What is a mortgage pre-approval letter?
Another reason to get pre-approved for a mortgage is so that the lender can give you a pre-approval letter.
- The letter will state how much you can borrow based on the information the lender has reviewed.
- You can include this letter with your loan offer to make your offer more attractive to sellers of homes you are interested in.
- The lender can work with your real estate agent to customize a letter for each offer.
Maybe you fall in love with a home listed for $400,000 and want to submit an offer. Let’s say you’re pre-approved for up to $450,000 and can put down 20%, but you don’t want to pay that high. Instead, you submit an offer of $405,000.
There are different rules of thumb, but some agents may recommend that you include a letter indicating that you are pre-approved for $450,000 and that you can borrow more if the home appraises lower or unexpected costs arise. Others might suggest that you include a letter with the pre-approved amount of $405,000 so you don’t give away your hand.
In either case, let’s say the seller receives your offer and a competing non-cash offer of $410,000. Even if they have the potential to get more money from another buyer, they may decide to accept your offer because they feel the deal is less likely to fall through.
Depending on the lender, a pre-approval letter may be valid for 30 to 90 days. If it expires before you purchase the home, you may need to send updated documents or information to obtain a new letter.
What documents are required for mortgage pre-approval?
The pre-approval process varies by lender, but you generally need to set up an account online and submit various types of information and documentation, such as the following.
personal information
- Name, current address and contact information.
- Government-issued photo ID.
- Social Security Numbers and Cards.
- Immigration related information.
- Work experience in the past two years.
- Rental history for the past two years.
- Information about other properties you own.
Income and tax information
- Most recent payslip.
- Offer letter for new job.
- Verify self-employment income, such as your company’s financial statements.
- Proof of other types of income, such as disability or alimony.
- If you received a gift, please include a gift letter.
- Tax returns for the past two years.
- Recent W-2 and 1099.
Account statement
- Checking and Savings.
- Brokerage Business.
- Retirement accounts such as IRAs and 401(k)s.
- loan.
- credit card.
Get pre-approved from multiple lenders
Mortgage shopping is important to get the mortgage with the best terms. Depending on your situation, that could mean a low interest rate, low closing costs, access to first-time homebuyer assistance, a jumbo loan, or an adjustable rate.
learn more: How do lenders set mortgage rates?
Because mortgage brokers and lenders may have access to different types of mortgages and programs, you can try multiple times to get pre-approved and compare your options. Generally speaking, lenders and brokers will require similar documentation, so just allow time to submit everything to each company.
If you’re not yet familiar with the term, a mortgage broker is a professional who can help you compare mortgage offers from various lenders. Lenders often pay brokers a fee to help bring in new clients.
Obtaining multiple pre-approvals can also set you up for success later on. You may want to hold off on choosing a lender and locking in a rate until you have an offer on your home accepted. If you’ve been pre-approved by multiple companies, it will be easier to compare quotes based on today’s rates and then choose a lender.
takeout
Mortgage pre-qualification and pre-approval are two ways to find out how much you can borrow to purchase a home. While some lenders use the terms interchangeably or even introduce different terms like verified pre-approval, pre-qualification is generally the less rigorous and helpful of the two.
Once you’re serious about buying a home, a pre-approval letter can make your offer more competitive. Getting pre-approved from multiple lenders can also help you get a more accurate idea of your borrowing limit, projected interest rates, and resulting monthly payments.
learn more: How much house can you afford?
