Pre-Qualification vs. Pre-Approval

These are two terms in the mortgage industry that have often been confused with each other and sometimes (unfortunately) are used interchangeably. Let's take a look at each term and the similarities and differences.



Pre-qualification means finding out how much mortgage you will qualify for.
Simply put, it means contacting a mortgage lender and supplying your basic financial information (income, assets, liabilities, downpayment, etc.) so he/she can determine the amount of mortgage you can afford.

Sometimes, but not always, the lender may check your credit report during a pre-qualification. This is usually the first step in looking for a home as it gives you the price range of homes you should be looking at. However, the usefulness of a pre-qualification is limited since the information has not been verified and it has not been approved by an underwriter.

Pre-approval, on the other hand, takes all of the information that is given for the pre-qualification and verifies it.

Your lender will definitely have to check your credit for a pre-approval as well as ask for documentation that verifies the information (W-2s, check stubs, bank statements, etc.). Your information is then sent to underwriting where an underwriter will approve the mortgage application. This gives the buyer a firm loan approval, subject to some conditions specific to the property (e.g. fully-executed sale contract, appraisal, homeowners’ insurance, etc.)

The pre-approval is superior to the pre-qualification since the buyer actually has an approval that he can show to the seller when negotiating a sales contract. It gives the buyer more bargaining power because the seller is at less risk of taking his property off the market while waiting for the buyer to be approved. Also, it makes the process much quicker since most of the work has already been completed.

If a lender tells you you are pre-approved, but does not verify the information provided and have it approved by an underwriter, it is simply a pre-qualification that they are calling a pre-approval. Typically, this will have many more conditions such as verification of the information, etc.

Pre-qualification is an important first step - but make sure you get an actual pre-approval right away. The bargaining power and convenience will make your home shopping experience much less stressful and more rewarding.