Getting a home loan for a house purchase involves so many documents that it can be easy to lose track of what you’re signing and what paperwork you still need to fill out. There’s also the matter of understanding what all the different terms mean in the first place. For example, what’s the difference between getting pre-qualified vs. pre-approved for a home loan? With the right real estate agent and loan officer by your side, you have a team of trusted advisors that help you understand your options and what you’re signing.
In this article, I collaborated with Josh Dalglish, Loan Officer at Academy Mortgage to cover the differences between pre-approval and pre-qualification and how they affect home shopper’s purchase options.
The information in this article should be taken as a general guide, not as specific answers to your individual situation.
The Basics: Pre-Qualified vs. Pre-Approved
Let’s start with our basic definitions of these terms:
Pre-Qualified: Getting pre-qualified means that you’ve completed a credit application and indicated what your income and asset position is, along with stating the intent of the home purchase (for example, occupancy or rental/investment property). Getting pre-qualified is always step 1.
Pre-Approval: Getting pre-approved involves submitting your financial documentation to your loan officer (i.e., paycheck stubs, tax returns, bank statements, etc.) for verification and approval, in addition to completing a credit application. This documentation will result in estimated calculations and a “Pre-Approval Letter,” which will indicate a maximum monthly payment for your mortgage.
What’s the difference between pre-qualification and pre-approval?
Though the two seem similar enough, there’s a key difference between getting pre-qualified vs. pre-approved for a home loan.
Pre-qualification is based on information you provide verbally (i.e., writing on an application how much your salary is), whereas during pre-approval, your loan officer has actually verified that your salary number is accurate (i.e., they’ve looked at supporting documentation such as paystubs, etc.). Pre-approval is what you need to move forward with a home purchase.
Though some lenders may charge a credit report fee upfront, Academy Mortgage does not.
The Pre-Qualification Process
Getting pre-qualified can be a first step to begin making offers on homes you tour. With this process, you’ll receive a pre-qualification letter which you and your agent will be able to present to sellers and selling agents to show that you’re taking steps to begin the official home purchasing steps.
As Josh says, “A pre-qualification letter lets the seller know that the lender has performed a cursory review of the borrower’s qualifications, but hasn’t yet verified the information with supporting documentation.”
Since pre-qualification doesn’t involve complete verification of your financial situation, it’s not a completely accurate view of your ability to buy a home. Because of that, pre-qualifications are not going to be specific to the offer you’re presenting on a home.
Since pre-qualification is simply based on a credit application, it can generally be completed quickly, usually within an hour or so.
The Pre-Approval Process
Getting pre-approved is the minimum standard in today’s market. When your loan officer has verified your income and run numbers specific to a house you’re making an offer on, you’ll have a pre-approval letter that essentially acts as a green light for the seller.
Josh says, “Sellers want to know that who they select as a buyer will be able to perform on the contract. Having verification with a pre-approval letter gives sellers that additional confidence to move forward with the deal.”
Do I need a pre-approval letter to see homes or make an offer?
A pre-approval letter is often preferred by most real estate agents but it’s not required. In some cases, in order to even schedule a viewing for a home, a selling agent will require a pre-approval letter. At the same time, some buyer’s agents will want to know that you’re qualified before spending time shopping for homes.
What information do I need to provide for a pre-approval?
Generally, the information your loan officer needs to verify your mortgage credit application includes:
- Tax Returns
- Benefit Award Letters
- Bank Statements
- Investment/Retirement Statements
- Additional items as applicable to the borrower’s situation may apply
Depending on the borrower’s situation, a pre-approval can generally be done within a few hours, assuming the credit application is complete and all requested supporting documentation is provided.
Final Notes on Getting Pre-Qualified vs. Pre-Approved For a Home Loan
If you’re wondering about your chances of getting pre-approved for a home loan, your best bet is to provide complete and accurate documentation to your loan officer.
As Josh says, the best way to move through these processes smoothly is to “prepare your supporting documentation as requested by your loan officer.”
When you make your loan officer’s job easier, you’ll be one step closer to home ownership!