Shopping for homes is exciting until you need to secure financing to buy. Even with savings, most Americans can only buy a house through a mortgage loan. In the fourth quarter of 2022, the US residential mortgage debt reached $11.92 trillion.
As home prices continue to soar and interest rates hit historic highs, getting a mortgage loan becomes increasingly tricky. Obtaining an estimate of how much you can comfortably spend on a home is an excellent starting point. Doing so shows your commitment as a serious buyer.
That’s where mortgage pre-approval and pre-qualification come into play. Both are valuable steps in the mortgage application process. While they’re often used interchangeably, every homebuyer should understand the critical distinctions.
Are you applying for a purchase mortgage or a home refinance? Read on to learn the difference between getting pre-approved and pre-qualified and how they affect your chances of purchasing a home.
The Differences Between Getting Pre-Approved and Pre-Qualified
Obtaining either pre-approval or pre-qualification means that a lender has examined your financial situation and verified that you meet specific criteria for their loan approval requirements.
While both terms are similar in many ways, pre-approval and pre-qualification differ. Understanding the distinctions between pre-approval and pre-qualification can help you decide which path to take as you start your home-buying journey.
Requirements
Pre-qualification requires limited information. Typically, the lender only asks about your basic financial information to give you an estimate of the mortgage amount you will qualify for. In contrast, mortgage pre-approval demands more information and documentation. Some lenders may even require you to fill out a mortgage application during pre-approval.
Timeframe
Since pre-qualification doesn’t involve an in-depth review of your finances and credit report, the process typically takes only a few minutes. Meanwhile, most lenders take 7 to 10 business days to process a mortgage pre-approval, though some may take only 1 to 3 business days.
Application fee
You can complete pre-qualification online or over the phone, so you usually don’t have to pay an application fee. Pre-approval applications also cost nothing. However, some lenders may impose an application fee, which can amount to several hundred dollars.
In some instances, lenders may waive application fees to attract more borrowers. Others may integrate the payments into the closing costs. Ask about these fees before submitting your pre-approval application.
Credit inquiry
Mortgage lenders will run a credit check to assess the likelihood that homebuyers will make timely loan payments.
With pre-qualification, the credit check is limited to a soft credit inquiry. It lets lenders view your credit report without affecting your credit score. On the other hand, pre-approval requires a hard credit inquiry, which remains visible on your credit reports for two years.
Accuracy
Since pre-qualification doesn’t involve in-depth financial background checks, it’s less reliable than pre-approval. Pre-approval provides more accurate information than pre-qualification.
For instance, when you get pre-qualified, the lender only gives you an estimate of the loan. However, pre-approval outlines the loan amount you’re eligible for, along with interest rate information. Getting pre-approval helps you know exactly where you stand and avoid delays when you need to act quickly on a purchase or offer.
Advantages
Since pre-approval is significantly more precise about the amount you can borrow and the corresponding interest rates, it gives you more confidence to negotiate with sellers.
Pre-approved buyers are more likely to close on the home at the agreed-upon price. Unfortunately, many skip the pre-approval process. However, avoid making concrete plans based solely on your pre-qualification status.
Pre-qualification can convince sellers you’re a serious buyer. However, getting pre-approved is paramount to stand out from other prospective buyers in today’s highly competitive housing market. Pre-approval gives sellers confidence that you can secure a mortgage.
To better understand the differences between pre-approval and pre-qualification, let’s look at how each works and the steps involved.
Understanding How Mortgage Pre-Approval Works
A mortgage pre-approval is one of the most valuable steps when securing a home loan.
These days, most lenders let you start the pre-approval process without ever stepping into a branch, and applying for an online home loan has become easy and efficient. An online home loan is now the default route for buyers who want a faster read on their borrowing power before they start touring properties.
Numerous lenders claim that your chances in a highly competitive housing market are slim without a pre-approval. But what exactly does getting pre-approved for a mortgage mean, and how can it help distinguish you from other potential buyers?
Obtaining a mortgage pre-approval doesn’t guarantee that you’ll secure a loan for the home you want to purchase. It’s only a written document from a mortgage lender verifying that you qualify for a mortgage under specific terms and conditions.
While it doesn’t ensure final approval, getting pre-approved makes you a more attractive home buyer to potential sellers. It gives you and the seller a clear picture of your borrowing capacity, so you can make an appealing offer that meets your needs.
Moreover, sellers are more likely to accept offers from someone with mortgage pre-approval than from someone without. That’s because a home sale is more likely to go through if the buyer has already been pre-approved for a mortgage.
Steps Involved in Getting a Mortgage Pre-Approval
When sellers get multiple offers or inquiries about their house, a mortgage pre-approval will secure you a more favorable position in the selection process.
But how do you get a mortgage pre-approval? Whether you’re a first-time home buyer or have been through the process, here’s an overview of the steps to get pre-approved for a mortgage.
Assess your finances and the market
A pre-approval is a physical assessment of your financial situation. Before getting pre-approved, it’s a good idea to assess your finances and understand the market.
Doing so can help you make a more informed decision about how much you feel comfortable spending monthly on your mortgage. A lender may grant you pre-approval for a larger monthly payment. Even so, you’d want to stick within your budget.
Contact a mortgage lender
Many mortgage lenders offer online mortgage pre-approval. Each lender’s guidelines and interest rate options can significantly affect your mortgage monthly payments.
So, it’s best to get quotes from multiple lenders. Getting pre-approved with one lender limits your options to what they have to offer. Meanwhile, pre-approval from several lenders gives you a better chance of finding the lowest rates and fees.
However, pre-approval usually involves a hard credit inquiry, which can lower your credit score by a few points. Some financial experts recommend getting pre-approved by up to three lenders. If you do, request pre-approval within 45 days to reduce its impact on your credit score.
Submit the necessary documents
Submit your application and required documents on time to avoid delays in the pre-approval process. The documents may vary depending on your occupation, loan type, and the residence category you intend to purchase. Ask mortgage lenders about their specific requirements.
Here are the documents commonly required when seeking mortgage approval:
- Personal identification
- Social Security card or driver’s license
- Most recent pay stubs
- Employment W-2 forms from several years
- Most recent federal and state returns
- Statements of bank and investment accounts
- Proof of deposits and assets
- Business records if you’re self-employed
- Credit reports
Receive your pre-approval letter
The speed at which a lender grants you a pre-approval letter varies. Some lenders take 7 to 10 business days to process a mortgage pre-approval. Others may only take one to three business days. Some elements that can impact the duration of the pre-approval process include:
- How fast you gather and submit the required documents
- The time needed to evaluate your financial paperwork
- The market’s demand for your choice of lender
- Income audits or other verifications
When Does It Make Sense To Get Pre-Approved for a Mortgage?
It’s wise to apply for mortgage pre-approval at the beginning of the home-buying process. This lets you gauge how much you can afford and positions you as a serious buyer. However, getting pre-approved too early can be wasteful for numerous reasons.
Pre-approval letters have a limited validity period, typically 30 to 90 days. Your pre-approval letter may expire before you can use it to buy your dream home. Only get pre-approved for a mortgage if you’re ready to bid or serious about making an offer on a home.
Moreover, mortgage pre-approval applications often cost money. Reapplying for another pre-approval will incur additional charges. Getting pre-approved generates a hard inquiry on your credit report. Thus, getting pre-approved too early can harm your credit score.
The mortgage pre-approval process can also take up to two weeks. So you would not want to apply too late for a mortgage pre-approval. Assess your situation and readiness to buy a home before getting pre-approved.
Understanding How Mortgage Pre-Qualification Works
Mortgage pre-qualification is another crucial step in home buying, especially for first-time buyers.
Pre-qualification lets you estimate how much you can spend on a house. Pre-qualification doesn’t guarantee mortgage approval, but it lets you explore different mortgage options and identify the one that best fits your needs and goals.
Typically, a pre-qualified mortgage also offers an estimated range of how much money lenders are ready to lend you. This gives you a general idea of your potential monthly mortgage payments. This information can help you avoid looking at properties beyond your price range.
Likewise, a pre-qualification letter from a lender lets you make a more appealing offer on a home. Although it’s not a guaranteed loan offer, getting pre-qualified reassures the seller that you can secure financing for the home purchase.
Many sellers and realtors won’t bother showcasing a home to potential buyers unless you have a pre-qualification letter. With a mortgage pre-qualification, you can better show you’re prepared and eager to buy a house.
Steps Involved in Getting a Mortgage Pre-Qualification
With mortgage pre-qualification, you can get insights into what you can afford in a house. Note that it doesn’t ensure a subsequent pre-approval. Regardless, you can get pre-qualified shortly after deciding to purchase a home.
What are the steps involved in securing a mortgage pre-qualification? Every mortgage lender operates differently. Still, most potential homebuyers can get pre-qualified through online platforms or over the phone. The following are a few measures to help you commence the process:
Examine your credit report
Pre-qualification relies on a cursory review of your financial details. Although pre-qualification involves only a soft credit check, reviewing your credit report is still a good idea. Doing so at the onset of your home search allows you more time to correct errors or pinpoint areas to improve your credit score.
Typically, it takes 30 days or more to see changes in your credit score. The sooner you start improving, the more advantageous it will be in the long run. A higher score can simplify the pre-qualification process and improve your chances of securing a lower interest rate.
Speak with a mortgage lender
Speaking with multiple mortgage lenders is also advisable to get the best deal. Compare their mortgage interest rates and the various loan options they offer. Decide which lender will best suit your situation. Customer reviews can also help you make an informed decision.
Since pre-qualification is a preliminary indication that a lender may approve you for a mortgage if you apply, most lenders only perform a soft pull credit check. Hence, getting pre-qualified with numerous lenders lets you explore loan options without hurting your credit score.
Discussing the pre-qualification process with a lender can provide valuable information to improve your credit or finances. When you apply for final approval for a mortgage application, you may qualify for a larger loan or better terms.
Provide financial documentation
Some lenders may require you to complete an application to get pre-qualified. Others may only gather your personal and financial information verbally, online, or on a call. Regardless, a pre-qualification review usually includes the following basic financial details:
- Income
- Employment history
- Monthly expenses
- Debts
- Savings
- Credit score
Get your pre-qualification letter
After you provide your personal and financial information to a loan officer, the mortgage pre-qualification process takes only a few minutes. Typically, the lender will shortly review your application. It doesn’t involve underwriting and is only based on general guidelines.
You can expect to receive a pre-qualification letter by email within a few minutes. After getting your pre-qualification letter, you can learn about the various mortgage options. It may include an estimated mortgage amount and the interest rates you will likely be approved for.
When Does It Make Sense To Get Pre-Qualified for a Mortgage?
Pre-qualification involves a less rigorous process than pre-approval. Since pre-qualification is usually free and doesn’t affect your credit score, it’s a good idea to get pre-qualified to compare lenders and their loan options.
A pre-qualified mortgage is also a great way to understand how much you can afford for a home. Note that pre-qualifications don’t expire. So, as long as there are no significant changes in your credit and finances, it will be helpful even if you’re still in the initial phase of house hunting. Pre-qualified mortgage loans also apply to loans for updating or renovations on your current home.
Navigate the Mortgage Process With More Ease
Unless you’re paying cash, getting pre-approved and pre-qualified is crucial in the mortgage application process. Both steps can help you secure a mortgage loan more easily. They boost your negotiating power and help you shop for homes within your financial reach.
Despite their differences, mortgage pre-approval and pre-qualification share a commonality. They serve as lenders’ confirmations that you’re qualified for a mortgage. As a result, you can navigate the loan approval procedure and home-buying journey with minimal complications.
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