What is the Difference Between Pre-qualification and a Pre-approval?
If you want the TLDR version, here it is: a pre-qualification is a preliminary review with no verification of any information provided, and a pre-approval typically means that the lender has obtained documentation and ran the loan scenario through an underwriting approval algorithm or thoroughly reviewed the loan program guidelines.
Let's say that you're shopping for a house and a lender says you're "pre-qualified" for $500,000. That's great - as long as they can perform on it! But if I were you, I wouldn't go shopping or putting offers on a house with just a pre-qualification letter.
Before you start mentally arranging (or buying!!) furniture in the $499,900 house you found online, there's an important question:
What exactly did the lender verify?
Because the terms "pre-qualified" and "pre-approved" are often used interchangeably—but shouldn't be.
What Is a Pre-Qualification?
A pre-qualification is generally an initial assessment based largely on financial information you provide.
You may tell the lender:
Your income
Your debts
Your available savings
Your estimated credit profile
The lender then gives you an idea of what you might qualify for. They could have even done a credit check. Prequal's are useful for early planning, but depending on how it's done, very little may have actually been verified and may be less reliable than you'd hope for.
What Is a Pre-Approval?
A proper pre-approval goes further than just you providing the information - it requires documentation review.
The lender should review things such as:
Credit profile and debts
Income documentation
Asset documentation
Employment history
The goal is to identify potential problems before you're under contract. Because discovering an income issue while you're casually shopping is inconvenient....but discovering it ten days before closing is a considerably less enjoyable experience.
Not All Pre-Approvals Are Created Equal
Just because a document says "Pre-Approval" across the top doesn't necessarily tell you how thoroughly the file was reviewed.
Some lenders perform a detailed review. Others may rely heavily on information entered into an online application. The verbiage may be the same, but the legwork the loan officer did could be drastically different.
Why Sellers Care
When you make an offer, the seller isn't only evaluating the price on your offer and pre-approval letter. They're also evaluating the likelihood that you'll actually close.
A well-qualified buyer with a strong pre-approval will give the seller and their real estate agent greater confidence in the transaction.
Especially when multiple offers are involved, certainty has value beyond just dollars. If they're going to pick one offer from multiple, they want to make sure it's likely to close.
Even a good pre-approval isn't a guarantee
Even a strong pre-approval isn't a final loan approval. The property still needs to qualify, and your financial circumstances must remain consistent through closing. Appraisals, title work, and more are yet to come.
That's why I tell buyers not to buy the new truck after getting pre-approved. Apparently the truck dealerships and mortgage lenders have opposing business objectives. Go figure.
Key Takeaway
Before house hunting, don't just ask:
"How much am I pre-approved for?"
Ask:
"What did you actually review and how solid is my financing?"
A mortgage pre-approval should do more than give you a price range. It should give you confidence that when you find the right house, the financing has already been carefully evaluated and is rock solid.
Because falling in love with a house is exciting. Finding out afterward that your financing doesn't work? Yeah, that's slightly less romantic and unfortunately happens more often than you might think.
-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage