Pre-Qualification vs Pre-Approval – What’s the Difference?
Updated: Sep 14
Trying to buy a house before you have financing is like putting the cart before the horse. You can’t buy a house without financing. Most sellers today want pre-approved buyers, but is a pre-qualification enough?
A pre-approval holds a lot more weight than a pre-qualification, but why?
What is Pre-Qualification?
A pre-qualification is an estimate of what you can afford. You discuss your qualifications with the loan officer providing your estimated credit score, monthly income, monthly debts, and down payment.
Based on the information provided, the loan officer estimates how much loan you can afford and in which loan program.
You can’t do much with the pre-qualification, but it is a nice starting point when you’re trying to figure out if you can buy a home.
What is a Pre-Approval?
A pre-approval is an ‘approval of sorts.’ It’s not a binding agreement and the lender can still deny your loan, but it’s a step in the right direction.
Lenders only issue a pre-approval letter after evaluating your qualifying documentation. Rather than telling the loan officer your details, you provide proof including:
Paystubs covering the last 30 days
W-2s for the last 2 years
Tax returns for the last 2 years if you’re self-employed or work on commission
Last two months of bank statements
Underwriters use this information to determine if you qualify. They’ll also pull your credit. If approved, they’ll write a pre-approval letter that states:
The loan amount
Potential interest rate
Down payment required
Any outstanding conditions
How are they Different?
If both the pre-qualification and pre-approval aren’t actual approvals, what’s the difference?
The pre-qualification, as we said, is an estimate. It holds no weight with sellers or real estate agents. Most lenders don’t write a pre-qualification letter. If they do, it’s not binding until you provide proof of your qualifications.
The pre-approval, is a step ahead of the pre-qual and is one step away from a concrete approval. When a lender pre-approves you for a loan, they qualify you based on your credit score, income, liabilities, and assets. Unless something ‘odd’ pops up between then and the closing, you have a good chance of getting approved.
The largest hurdle with a pre-approval is the appraisal and title work. In other words, the property must pass the lender’s requirements to get you to the closing table.
What’s Right for You?
There’s a time and place for both the pre-qualification and pre-approval.
If you’re just thinking about buying a home but aren’t sure where you stand, a pre-qualification is a great idea. It gives you an idea of where you stand. You’ll know what you need to fix to get approved or what you need to leave as-is because lenders liked it.
If you’re ready to buy a home, you need a pre-approval. The letter itself will get you in more doors and give you leverage during a bidding war. Sellers want the pre-approval letter so they know you’re a serious and capable buyer.
Either way, make sure you have a reputable lender to work with as you head down the path to homeownership.