Pre-qualification and pre-approval: what is the difference?

Pre-qualification and pre-approval: an overview

Most real estate buyers have heard that if they want to buy a property, they need to pre-qualify or obtain pre-approval for a mortgage. These are two key steps in the mortgage loan application process. Some people can use these terms interchangeably, but every home buyer should understand the important differences.

Prequalification is only the first step. It lets you know how big a loan you might be eligible for. Pre-approval is the second step, which is a conditional commitment to actually grant you a mortgage.

“The prequalification process is based on data submitted by consumers,” said Todd Kadrabeck, a residential agent with Beverly-Hanks real estate agents in downtown Asheville, North Carolina. “Pre-approval is verified consumer data. For example, credit checks.”

Key points

  • Prequalification is based on data submitted by borrowers to lenders, which will provide a rough estimate of how much they can borrow.
  • The amount of prequalification is not certain, as it is based only on the information provided.
  • Before reaching the pre-approval stage, lenders will not carefully review the financial status and history of the borrower to determine how much mortgage they can reasonably afford.
  • After obtaining the pre-approval, the borrower will receive a conditional written commitment to provide the exact loan amount.

prequalification

Obtaining prequalification involves providing banks or lenders with their overall financial status, including debt, income, and assets. The lender reviews everything and estimates the amount the borrower can expect to receive. Pre-qualification can be done over the phone or online, and usually does not involve any fees.

The prequalification is very fast, and it usually takes only one to three days to obtain a prequalification letter. Remember, loan prequalification does not include analysis of credit reports or in-depth knowledge of the borrower’s ability to purchase a house.

The initial prequalification step allows discussion of any goals or needs related to the mortgage. The lender will explain the various mortgage options and recommend the most suitable type.

Likewise, the amount of prequalification is not certain because it is based only on the information provided. This is just the amount that the borrower may expect to receive. Buyers who pass prequalification are not the same as pre-approved buyers who have undergone a more thorough investigation.

Nevertheless, pre-qualification can still be helpful when making an offer. “The quotations on our market almost require a prequalification letter,” Kaderabek said. “The seller is very savvy and does not want to sign a contract with a buyer who is unable to fulfill the contract. This is one of the first questions we ask potential buyers: Have you met with the lender and confirmed your advance payment? Eligibility status? If not, We will advise the lender. If so, we will request and keep a copy of the prequalification letter.”

The loan prequalification is based only on the information handed over to the lender, so it doesn’t make much sense if you don’t provide accurate data.

Prequalification letter

The following is an example of a prequalification letter:

Pre-approved

Obtaining pre-approval is the next step, it involves more. Kaderabek said: “Prequalification is a good indicator of credit and lending ability, but pre-approval is a clear word.”

The borrower must complete a formal mortgage loan application to obtain pre-approval and provide the lender with all the necessary documents for extensive credit and financial background checks. The lender will then provide a pre-approval that does not exceed the specified amount.

The pre-approval process can also provide a better understanding of the interest rate to be charged. Some lenders allow borrowers to lock in interest rates or charge pre-approved application fees, which can amount to hundreds of dollars.

The lender will provide a conditional commitment of the exact loan amount in writing, allowing the borrower to find a house at or below that price level. This gives the borrower an advantage when dealing with the seller, because they are one step closer to obtaining an actual mortgage.

Remember, you don’t have to shop in the highest price range. Depending on market conditions, you may be able to enter your favorite house with less money than approved, allowing you to have extra cash each month for retirement, your child’s college fund or check a list of things from your bucket.

Main difference

The following is a brief overview of the differences between prequalification and pre-approval.

prequalification Pre-approved
Do I need to fill out a mortgage application? No Yes
Do I need to pay an application fee? No perhaps
Is a credit history check required? No Yes
Is it based on a review of my financial situation? No Yes
Do I need to estimate the amount of my down payment? No Yes
Will the lender estimate the loan amount for me? Yes No
Will the lender give me a specific loan amount? No Yes
Will the lender provide me with interest rate information? No Yes

special attention items

The advantage of completing the two steps of prequalification and pre-approval before looking for a house is that it provides an idea of ​​how much the borrower must spend. This prevents wasting time looking at properties that are too expensive. Obtaining pre-approval for a mortgage also speeds up the actual buying process, letting the seller know that the offer is serious in a competitive market.

After selecting the house and making an offer, the borrower provides the lender with a copy of the purchase agreement and any other necessary documents as part of the complete underwriting process. The lender hires a third-party certified or licensed contractor to conduct a house evaluation to determine the value of the house.

The last step in the process is a loan commitment, which will only be issued after the bank approves the borrower and the relevant house-this means that the valuation of the property is equal to or higher than the sale price. If the appraiser raises any issues that should be investigated, such as structural issues or HVAC system failures, the bank may need more information.

Your income and credit status will be checked again to ensure that nothing has changed since the initial approval, so this is not the time to go out and buy large furniture.

The prequalification and pre-approval of obtaining a mortgage allows potential home buyers to know in advance how many homes they can afford. But most sellers are more willing to negotiate with pre-approved sellers. Pre-approval also allows the borrower to close the house more quickly, thus gaining an advantage in a highly competitive market.

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