Many homebuyers are easily misled by lenders who pre-qualify them for a loan only to later deny them after they make an offer on a home they really can’t afford. Understanding the difference between pre-qualification and pre-approval is important. Being properly prepared before beginning the homebuying process can save you a lot of time, stress and disappointment.
Pre-qualification is the first — and easier — step in the mortgage process. It can be done online or over the phone and is usually free of charge. It involves giving your lender general information about your financial situation, including your assets, liabilities and income, that the lender then evaluates to give you an idea of the mortgage amount for which you would qualify. Pre-qualification primarily serves as an opportunity to discuss your homebuying needs and goals with a lender and explore their loan recommendations that might be best suited to your situation.
The pre-qualification process is not in depth and does not even include an analysis of your credit report. Because of this, a pre-qualified buyer doesn't carry the same weight as a pre-approved buyer who has been more thoroughly screened. Therefore, pre-qualification is technically an unnecessary step; however, it is helpful to buyers looking for a quick estimate of how much loan money they’ll have to work with. They can then use that information to focus their home search and prove to a seller that they’re serious.
Pre-approval is the next (and required) step in obtaining a mortgage after pre-qualification, and is typically more thorough. It involves completing an official mortgage application, which usually requires a fee, followed by providing the lender with the necessary documentation (e.g. account statements, pay stubs, tax returns, credit report) to perform an extensive analysis of your financial situation and credit history.
Then the lender can tell you the specific loan amount for which you are approved and give you a better idea of the interest rate you would get, which you might be able to lock in for a certain period of time (typically 30 days). At the end of the pre-approval process, you receive a conditional commitment in writing from the lender for an exact loan amount, allowing you to focus your homebuying search on properties at or below that price level, and giving you an advantage over other potential buyers without it.
Making the effort to go through the pre-qualification and pre-approval process before you start house hunting is a smart strategy to help you understand ahead of time how much you can afford and avoid wasting time looking at homes that are beyond your means. It also puts you in a position of power when negotiating with sellers.