To qualify for a mortgage, there are certain financial requirements you have to meet. You've probably heard about mortgage pre-approval and mortgage pre-qualifications if you are in the midst of the application process.
But do you need both of them to obtain financing? Are they even different at all?
Here’s everything you need to know about the pair so that you can make the best choice for your mortgage (with the least amount of stress):
Pre-Approval vs. Pre-Qualification
Both processes can help you get a mortgage for your home; however, they are both very different things. You might often hear people using the terms interchangeably, but that is not correct.
Like with most things in real estate, it's easy to get confused. So here is a quick look at each of them:
Pre-Qualification for a Home Loan
Pre-qualification is usually the first step in the mortgage process.
This is the part when you give your complete financial history to your lender. Your complete financial history includes things like how much money you make and what kinds of assets you already own. It also includes things like how much debt you have (including commercial debt and student debt) and your current credit score.
Your lender looks over this information and recommends the options for the kinds of home loans (mortgages) that you would qualify for. However, sometimes the pre-qualification process for mortgages is self-reported. This means that you don’t work with a lender. You simply gather all of the information for yourself and bring it to them.
Because of the option for self-reporting, this option does not require a hard credit check. This makes it very popular.
Pre-Approval for a Home Loan
The reason that lots of people make the mistake of using the terms pre-approval vs. pre-qualification interchangeably is because they really are similar.
But there is one glaring difference: you cannot self-report your financial information for mortgage pre-approval. A qualified lending professional must take a look at it all and verify it for you.
They will verify your income, assets, and debts. Then, they will do a credit check to confirm your credit score. This is a legitimate credit check, so it shows as a "hard hit" on your score.
After they check all of this, they will recommend whether or not you are approved for a loan to purchase a home.
Pre-approvals can last anywhere from three to six months. So, unlike pre-qualification, you have a little bit more time to find the home you would actually like to mortgage.
Pre-Approval vs. Pre-Qualification: Similarities
Here is a little bit more on why so many people in the real estate industry seem to think that these two are the same thing:
Both pre-approval and pre-qualification evaluate your financial situation. They both help you understand the mortgage process better, including things like your interest rate and credit report.
No matter which one you use, you will save yourself a lot of hassle at the beginning of the home buying process. This is because once you have your pre-approval or pre-qualification letter in hand, you will be able to create a realistic budget. You will only look at homes that have a mortgage rate that you can afford.
Both methods also signal to sellers that you are serious about their properties. This is because you can prove that you have already done your financial homework. You can use your letter to show a buyer that you don’t just love their home, but it is also financially feasible for you to purchase it.
Sellers don’t want to accept offers from buyers who won’t be able to pay. If the market that you buy a home in is particularly competitive, then having pre-qualification from a mortgage lender can really make you stand out in the crowd of offers.
Warning About Pre-Approval vs. Pre-Qualification
The key thing to remember about both pre-approval and pre-qualification for a mortgage: they are not final approval. Just because you are pre-qualified for something does not mean that it is a done deal. It’s not in the bag just yet, so you should not act like it is.
While many potential homebuyers tend to return to the place that prequalified them to obtain their actual loan, there is still more to think about. You do not have to go back to a certain lender just because they pre-qualified or pre-approved you. If you really want to, you can go to a completely different company altogether for your actual mortgage.