is being pre-qualified or pre-approved better

The terms pre-qualified and pre-approved refer to a mortgage. Before you start looking at homes in person, it is important to talk with a mortgage lender and find out what your home buying budget can be. After you have turned in some financial paperwork, the lender will give you a letter detailing how much a bank is willing to lend to you for the purchase of a property. Sometimes, the words pre-qualified and pre-approved are used interchangeably, but they really mean two different things.

What are the similarities between being pre-qualified or pre-approved?

In both processes, you will speak with a mortgage lender and share your personal financial information. The lender will look at things like bank statements, credit history, and your employment situation. The lender then makes a determination if your financial markers meet the qualifications to potentially receive a mortgage. The lender will share an estimate of your home buying budget and can give you an idea of what a monthly payment would be. Lenders can also share the advantages and disadvantages of different loan programs (conventional, FHA, VA) and help you select the one that is best for you.

It is important to know that being pre-qualified or pre-approved does not guarantee you will receive a loan from the lender. If, while going through the home buying process, circumstances around your finances change like you buy a new car or switch jobs, then these changes can impact your ability to receive a loan. That is why it is always vital to consult with your mortgage lender first before you make any financial changes no matter how big or small they seem to you.

Why do I need to be pre-qualified or pre-approved?

Going through either process tells you how much money you have to spend on a home. It will give you an idea of what your monthly payments will be and will help you better determine the price level at which you are most comfortable. Remember, you don’t have to spend exactly what you qualify for-you can spend less.

When you find a home you would like to purchase, a seller will expect a pre-qualification or pre-approval letter to be included in the offer. This shows the seller that you are serious about purchasing a property and have the funds to do it.

What does being pre-qualified mean?

A pre-qualification is a shorter process than a pre-approval. You will still have to provide some financial information to the lender like your income and bank information, but it is a less detailed look into your finances. While mortgage lenders will look into your credit history, they may not pull a score since it will temporarily lower your number.

If the lender feels you qualify for a mortgage, the lender will issue you a letter with an estimated amount. Remember to always be honest with your lender when you are trying to become pre-qualified. Don’t hide any debts; your mortgage lender is here to help you and they can’t fully do that if you don’t disclose all your financial information. Since a pre-qualification is based mostly on what you tell a lender, a letter is issued based on the information you give.

Most of the time, if a buyer gets pre-qualified it is because they unexpectedly find their home. A lender may do the quicker pre-qualification process so the buyer can make an offer on a home, but then follow through with a pre-approval afterwards.

Other times, buyers will get a pre-qualification letter because they are interested in purchasing a property in the near future, but would like an estimate of what their mortgages would be.

What does being pre-approved mean?

A pre-approval is a more detailed look into a buyer’s finances. The lender will ask for bank statements, tax returns, copies of W-2s, and will look into a buyer’s credit score. This process takes at least a week. Afterwards, the lender will issue you a letter that states the amount you can borrow as well as the interest rate.