When it comes to pre-approval vs. pre-qualification, only one is going to jump-start your home-buying journey. That doesn’t mean that both can’t be helpful. Both let lenders assess your borrowing power based on your debt-to-income (DTI) and credit history.
A home loan pre-approval letter will get real estate agents and sellers to take you seriously. A pre-approval is a thorough vetting, with verified documents, income, and a hard credit pull. A pre-qualification is useful to get an estimate of the amount you could potentially qualify for. Your finances are not verified by a lender during loan pre-qualification.
What Does Pre-Qualification Mean?
Pre-qualification is a quick process that gives you an estimate of how much you’d qualify for if you applied for a mortgage. The big difference with pre-approval vs. pre-qualification is that pre-qual is based on self-reported information.
Your lender won’t pull up your credit score or request extensive documentation. Some lenders will even let you complete a pre-qualification process online that produces results in just an hour. You might be asked to provide information regarding:
- Identification
- Employment/income
- Tax returns/W-2s
- Bank statements
- Assets
- Monthly debt obligations
- Estimated down payment
- Bankruptcy history
Pre-qual is essentially a basic review to assess your creditworthiness. If you’re in the beginning of your home buying journey, a pre-qual can be the next step after using a mortgage calculator to get an idea of “how much home” you can afford.
It’s common knowledge that pre-qualification is based on unverified information.
What Does Pre-Approval Mean?
Pre-approval is as close to the actual mortgage approval process as you can get. Your lender will do a hard pull of your credit history to see where you stand. They will also ask for documentation proving your income and financial status. For people with complex income streams, commission-based earnings, or self-employment income, pre-approval is especially important for making sure lenders have the full picture when assessing your creditworthiness.
If you’re preparing to apply for mortgage pre-qual, go ahead and get these documents you need to apply for a home loan prepared ASAP:
- Personal identification
- Tax filings/W-2s going back two years
- Recent pay stubs going back at least two months
- Bank statements
- Proof of any extra sources of income
- Credit card reports
- Rent statements (potentially)
- Loan statements going back 60 days for personal loans, car loans, or student loans
Of course, your lender will also be looking at your credit score. Make sure you’re checking your credit score before the process even begins. Errors in your credit history could actually harm your ability to get approved for a mortgage. They could also make you eligible for higher interest rates.
If you see mistakes on your credit history, you can dispute them with the reporting creditor or agency. Of course, you may also decide that your credit score simply isn’t in good enough shape for you to start applying for a mortgage. Paying down debt, boosting income, and making other changes could get you more prepared in six to 12 months.
Turnaround times for mortgage pre-approvals can vary. Some lenders may be able to provide you with a pre-approval letter in a day or two. Others might take up to 10 days. Timelines often come down to demand at any given time.
Your lender will consider your preapproval letter valid for several months. If you don’t find the home of your dreams within that span, most lenders can easily update your pre-approval for you.
A pre-approval letter is not a binding offer. While a lender is giving you an educated estimate of the mortgage amount you’re likely to be approved for, there is no guarantee that you will be given a mortgage. What’s more, your interest rates and final terms could differ from what’s on your pre-approval letter.
Preference for pre-approval vs. pre-qualification is one of the important questions before making an offer.
There are two ways to use your mortgage pre-approval letter. First, this document shows you exactly how much you can afford when buying a home. That means you can narrow down your search to a specific price bracket.
Next, your pre-approval letter shows agents and sellers that you’re qualified to purchase a home in a specific price range. You can now confidently submit offers, knowing that sellers will take them seriously.
