Pre-qualified and pre-approved are terms you’ve probably heard when you are looking to buy a new home and or sell your home.
Unfortunately, most people often use these two phrases interchangeably, not knowing they are not the same. Because of that, we would like to clarify everything you need to know about pre-qualification and pre-approval.
What Does Pre-Qualified Mean?
When you’re looking to buy a new home, you may want to get some guidance on how much you’ll be able to borrow so you know what you can afford. It doesn’t make much sense to look at a $500 thousand dollar home if you can only borrow $300 thousand and you don’t have $200 thousand for a down payment.
Banks and other lenders can give you an estimate when you provide them with some basic financial information, including your assets, income, and debts.
This process is known as ‘being pre-qualified.’ It’s usually free, and you can do it online, in person, or over the phone.
What Does Pre-Approved Mean?
On the other hand, being pre-approved is usually the next step after pre-qualification. It is more significant and requires more work on your part. You will be asked to complete an application and provide additional information and documentation.
The lender will then conduct a thorough financial background check based on the information you provide. If your application meets all the requirements for that particular loan, the lender will offer a specific loan amount based on your financial background.
You will also find out more about the interest rate for the loan you have been pre-approved for at this stage. In addition, pre-approval allows you to begin searching for homes within the price range provided by the bank or lender.
Finally, pre-approved means you can start negotiations with the seller because you have a higher chance of being approved for the mortgage.
Differences Between Pre-Qualified and Pre-Approval
As mentioned earlier, these two terms are often thought to mean the same thing, but they are very different. The following information provides more specifics about the differences, but keep in mind there might be slight variations in requirements per lender.
Mortgage Application
In a pre-qualification, you don’t need to fill out a mortgage application. Instead, the lender or bank wants to know where you stand financially. In a pre-approval, you need to fill out a mortgage application.
Application Fees
You do not typically need to pay any application fee during pre-qualification. However, some pre-approval applications involve an application fee.
Financial Background Check
A pre-qualification does not include a financial background check, but pre-approval does. The latter may analyze your bills, debts, credit history, and anything in between to find out whether you are eligible for a mortgage and the exact amount to offer.
End-Goal
The end goal of pre-qualification is to find out about you as the borrower, but a pre-approval focuses on finding out more about your finances. It involves analyzing documentation to prove the information you provided during pre-qualification.
Down Payments
You don’t need to estimate your down payment during pre-qualification, but you do need it for pre-approval.
Loan Estimate
During pre-qualification, the lender will provide an estimate of a loan amount for you. However, the same does not apply for pre-approval; you won’t find out how much the lender can offer until they’ve reviewed your finances.
Loan Amount
The loan amount offered during pre-qualification is just an estimate, which could change during pre-approval. On the other hand, the amount shown during pre-approval is usually the specific amount the lender will give.
Interest Rate
During pre-qualification, the lender won’t tell you anything about the interest rate. But, pre-approval involves disclosing the interest rate after the lender establishes a certain amount they are willing to part with based on your financial background.
Bottom Line
Pre-qualification and pre-approval have two different meanings, even though they may sound almost the same. During pre-qualification, you’ll provide basic information, such as your income, down payment amount, desired mortgage amount, and so on.
The pre-approval process requires copies of your pay stubs as proof of income, a financial background check, bank statements, down payment amount, desired mortgage amount, tax information, and so on.
Pre-qualification usually happens before pre-approval and it’s more of an estimate of what you can afford based on the information you provide. The amount may change during pre-approval after reviewing your financial records.
Pre-approval is much more precise and gives you the confidence to engage sellers, knowing the lender has a certain pre-approved amount you can borrow.
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