Mortgage Q&A: “Pre-Qualification vs. Pre-Approval”
When you initially set out to purchase a new home, the real estate agent(s) and home seller will want to know you can actually afford the thing. Heck, you should want to know too.
After all, if you can’t afford to buy it, you’ll be wasting everyone’s time, including your own. Aside from affordability concerns, you may find other issues that disqualify you from obtaining a mortgage (do I qualify for a mortgage?).
And these issues aren’t always obvious, especially to the first-time home buyer who has never obtained a home loan before. You might think you’re good to go, but because of the nuanced and ever-changing mortgage landscape, it’s better to know for sure.
You Won’t Get Very Far Without a Pre-Approval…
As noted, real estate agents and home sellers will want to be certain that you’re committed to buying a home, as opposed to those just casually browsing, so they don’t miss out on a legitimate buyer in the process.
After all, if it’s between you and another qualified buyer, and they pick you, without knowing you can obtain a mortgage, it’ll be a tough sell to go back to that other buyer after the fact. They’ll lose a lot of leverage, assuming that other buyer sticks even around.
For these reasons, most real estate agents will demand that you get pre-approved for a mortgage loan before they even begin showing you potential properties. Additionally, most agents have a preferred mortgage contact they’ll likely refer to you to get the ball rolling.
Tip: You can use this contact for your pre-qualification and pre-approval needs, but don’t forget to shop around with other banks and brokers as well to ensure you obtain the lowest mortgage rate possible! There’s absolutely no obligation to use the broker, bank, or lender that provided the pre-approval.
What Is a Mortgage Pre-Qualification?
- A quick check to see if you qualify for a mortgage
- That doesn’t require a credit pull
- Or any verified information such as tax documents or bank statements
- Simply a first-step to get the ball rolling
If you choose to finance the home purchase with a mortgage, as opposed to cash, you’ll likely need to get pre-qualified first. A “pre-qualification” isn’t as robust as a pre-approval, but it’s a good first step to ensure you can purchase the home you desire (or any one at all).
A pre-qualification is a pretty straightforward, simple check to see what you can afford based on your income/debt levels (debt-to-income ratio), assets, down payment, employment history, perceived credit score, and so on.
You can get pre-qualified very quickly and easily with a bank or mortgage broker, but it won’t carry much weight in the eyes of the agent or the seller.
After all, with a pre-qualification you’re simply supplying estimates of how much you make, or what’s in your savings account, and your credit report may not even be pulled to avoid the hard inquiry.
You should pull your own credit report via a free website like Credit Karma before you even speak to a mortgage lender so you know where you stand. Doing so won’t count against you, whereas a lender-initiated credit report will.
In short, a pre-qualification, or pre-qual as its known in the industry, is just a quick determination of what you’d likely qualify for if you made an offer and applied for a home loan.
It’s not necessarily a waste of time, but it’s not going to get you very far. You can liken it to running a few numbers to see where you stand, but it cannot be used in place of a pre-approval.
However, it might uncover some issues that will need to be addressed before you can be approved for a mortgage, so it’s certainly something to consider as you learn more about the process.
What Is a Mortgage Pre-Approval?
- A more official process to see if you qualify for a mortgage
- That requires a credit check from the lender
- The review of financial documents
- And possibly an automated underwrite
A pre-approval, on the other hand, actually has legs. It’s a written, conditional commitment from a bank or mortgage lender that says you are pre-approved for the mortgage financing in question.
It comes only after filling out a loan application, supplying verified income, asset, and employment documentation (assuming these items are necessary), running credit, and underwriting the loan file based on current mortgage rates.
When mortgage lenders verify these things, they can actually calculate minimum credit card payments, student loans, and other debt obligations against your income to figure out your DTI and subsequently what you can afford.
Aside from being way more accurate, furnishing a pre-approval letter shows the interested parties (sellers, agents) that you’re a committed home buyer, boosting your chances of sealing the deal at the price you want.
Getting preapproved will also show you how much house you can afford, not just a flimsy estimate. This is important for you as well to ensure you don’t get in over your head.
Mortgage Pre-Approval Requirements:
- Credit report
- Bank statements
- Pay stubs
- Tax returns
How Long Is a Mortgage Pre-Approval Good For?
- Generally good for 60-90 days
- But there’s no guarantee depending on what transpires
- It’s just a conditional approval based on the information in the file
- So if anything material changes, your approval status may also change
Once you provide all the required documentation and get the mortgage pre-approval letter from a bank or lender, it is typically valid for 60-90 days. Just note that a lot of things can change during that time, such as your credit score, so it’s not 100% guaranteed.
Again, a pre-approval is not a guarantee that you will be approved for a mortgage. Otherwise it would just be an outright approval. And even an approval is still conditional on you meeting a series of requirements set forth by the lender.
If things do change dramatically, or even a little bit, it won’t matter if the pre-approval is just a few days old, as material changes can affect the outcome of your approval.
For example, if your credit score falls below a key threshold, like from 620 to 618, you could be denied after getting your pre-approval letter. It’s not the bank’s fault either, it’s just an unfortunate turn of events.
Same goes for anything the underwriter sniffs out during the approval process. They get a lot more involved and may find things that were initially missed, such as a late payment or a credit card or personal loan you didn’t disclose.
When it comes down to it, an approval is never a sure thing until the mortgage is funded and closed!
As you can see, being pre-approved and pre-qualified are not the same thing, so make sure you know the difference before shopping for a home.
Do You Need a Mortgage Pre-Approval Letter to Make an Offer?
- In a hot real estate market
- It’s generally a necessity to have a mortgage pre-approval in hand
- While highly recommended, it’s not an outright requirement
- And may not be necessary in colder real estate markets
At the end of the day, you don’t necessarily NEED a pre-approval letter to make an offer on a piece of property. But nowadays, with so few properties on the market, and so many multiple-bid situations, it’s often a requirement just to hear back from the seller’s agent.
Sure, you can tell your real estate agent to tell the listing agent that you’ve got an 800 credit score, $1 million in the bank, and a job that pays you $500,000 a year. And they might say fine, skip the pre-approval.
But chances are that’s not your financial profile, so just to play ball and keep everyone happy, it often makes sense to get the pre-approval done. It will also strengthen your offer. And you might learn or catch something along the way.
As I alluded to earlier in this post, it’s good to know where you stand as well. You might think you’re a sure shot at getting a mortgage, but surprises aren’t all that uncommon and mortgage underwriting guidelines change all the time.
So a pre-approval could actually save you time and money, despite being a task that needs to be taken care of upfront. It shouldn’t take very much work to get one anyway.
There are brokers and lenders that can get you one the same day, or even within a few hours, thanks to new technologies that are able to automatically verify things like your credit scores, employment, income, and assets.
Just remember not to feel obligated to use the bank that furnishes the pre-approval letter for you! It’s entirely possible to go elsewhere, and even use the letter to get a better offer from a different lender.
Next Step After Mortgage Pre-Approval
- Either apply for a home loan with the lender in question
- Or apply for a mortgage elsewhere
- You aren’t obligated to use the same lender you got the pre-approval from
- So make sure you take the time to comparison shop
The next step after receiving a mortgage pre-approval is to either apply with the lender who provided it or apply for the loan elsewhere. You can certainly shop around and decide which company is the best fit.
In fact, you can even use the pre-approval quote as leverage to get a better mortgage rate (and/or lower closing costs) with a different lender. Remember, you can use any company you wish, regardless of what your real estate agent tells you!
Once you’ve selected a lender, you’ll need to sign disclosures and express your intent to proceed with the loan application. The lender will then begin collecting paperwork and signatures, including the purchase contract, in order to process the loan.
It will eventually land on an underwriter’s desk for full approval, at which point a list of conditions will be generated (if applicable) in order to draw docs and fund the loan.
You will also be given an opportunity to lock your loan early on so the interest rate you are quoted won’t change.
If you think interest rates may improve in the interim, it’s perfectly acceptable to float your rate as well. Be sure to consult with your loan officer or mortgage broker if you need direction.
To summarize, the difference between a mortgage pre-qualification letter and a mortgage pre-approval letter (for you lazy readers):
- First step
- Less robust
- Based on estimates
- Doesn’t require a credit pull
- Carries less weight/ not a sure thing
- Not taken seriously
- Based on verified information
- Must complete an actual loan application
- Requires a credit pull
- Must be underwritten (manual or automated)
- Written conditional commitment
- Shows sellers/real estate agents you’re serious