When considering applying for a mortgage, you might wonder, should I get pre-qualified or pre-approved?
They sound like the same thing, but they have different outcomes. Of course, each has a time and place, but understanding the differences is essential.
What is a Pre-Qualification?
A pre-qualification is an estimate of what you can afford. Most lenders rely on verbal information from the borrower versus actual proof of your income, assets, and liabilities.
A pre-qualification gives you a ballpark idea of what you can afford, but it’s not a true approval. Instead, consider it your starting point when considering buying a house. Many borrowers get pre-qualified six months to a year before they are ready to buy a home. It helps them understand where they stand and if they need to save more money, improve their credit, or decrease their debt before applying for a mortgage.
How do you get Pre-Qualified?
To get pre-qualified, contact a lender and discuss your situation with a loan officer. They’ll ask questions like the following:
- What’s your estimated credit score?
- How much do you make monthly?
- How much money do you have saved for a down payment?
- How much monthly debt do you have?
Answering these questions honestly helps a loan officer fit you into a loan program, but it’s not an approval. Instead, it gives you an idea of what you can afford and/or what you should change to get a better loan program.
For example, suppose a loan officer tells you that your qualifications meet FHA guidelines, but you want a conventional loan to avoid mortgage insurance. In that case, you could determine what you must improve to qualify for a conventional loan when you’re ready to buy a home.
What is a Pre-Approval?
A pre-approval is different from a pre-qualification. When you get pre-approved, you provide the lender with information proving your income, assets, and liabilities.
A pre-approval is the closest you can get to getting approved for a loan without a sales contract. When you get pre-approved, the lender determines that your credit and income qualify you for the chosen loan program.
After a lender pre-approves you for a loan, they’ll supply you with a pre-approval letter stating how much you can borrow, at what interest rate, and what conditions you must satisfy before closing the loan.
How do you get Pre-Approved?
To get pre-approved, you must prove to the lender the information you provided on your loan application. Each lender has different requirements, but here’s what most require:
- 30 days of paystubs to prove your current income
- Two years of W-2s to prove your income stability
- Two years of tax returns if you are self-employed
- Two months of bank statements to verify your assets for the down payment and closing costs
- Proof of employment
An underwriter will review the information to ensure you meet the chosen loan’s guidelines and pre-approve your creditworthiness for the loan. In this process, the underwriter will do a hard credit pull, checking your credit score and ensuring your credit history meets the program guidelines.
Pre-approval letters are good for 30 – 60 days, so get pre-approved before you look at homes, but not until you’re ready to actively look for a home.
Which is Better?
Understanding the difference between pre-qualification and pre-approval is essential, but knowing which is better given your situation is even more critical.
To decide which is correct, answer the following questions:
- Are you ready to look at homes and place an offer?
If yes, then you should get pre-approved. Sellers often only accept offers from pre-approved buyers because it shows your creditworthiness and seriousness about buying a home.
- Are you wondering how much home you can afford?
If you’re just exploring your options and considering buying a home but aren’t sure, a pre-qualification is best. Likewise, pre-approval is best when you’re ready to look at houses and place an offer.
Getting pre-qualified is not necessary, but pre-approval is crucial when you’re ready to buy a home. Getting pre-qualified helps you prepare for the loan process and alerts you of any issues you should clear before formally applying for a loan, but it’s not essential.
A pre-approval, however, is crucial because it shows sellers you can buy the home and lets you know what you can afford. As a result, you’ll save time by only shopping for homes you can afford and can beat the competitors if others are interested in the same house if you’ve already secured your financing.