Pre-Qualification vs Pre-Approval: Do You Know the Difference? Are you about to seek out the services of a realtor to help you find a home, either for your primary residence or to use as an investment? One of the first questions he will ask you is if you are going to pay for the property in cash or take out a mortgage. If you indicate that you’ll be needing financing, he will then ask whether you are pre-approved yet.

The process of pre-approval and pre-qualification shows potential sellers that a bank or other lender has taken a look at your financial situation and indicated that you are likely to qualify to buy a house. If you have a pre-approval letter with you, your offer will be taken more seriously than a buyer who does not have one yet.

Within the real estate market, the words “pre-qualification” and “pre-approval” are often swapped out with one another, to the point where it is easy to mistake one for the other. Let’s take a look at a couple of situations to help you understand the difference between them.

What is pre-qualification?

Let’s say that you want to buy a new property. You call a lender for pre-qualification and talk to a loan originator briefly. Less than half an hour later, you have a pre-qualification letter show up in your email inbox. You didn’t have to submit any proof of assets or income, but on the basis of your answers, you are told that you can qualify for a home as long as the purchase price is not over $500,000. You go out looking for a home and find the perfect one for $489,900, and the seller accepts your offer of $480,000. Now you have to turn in all of your documents showing your financial situation and your income. The lender calls a couple weeks later to tell you that the underwriter has turned down the loan because you were basing your application on overtime pay — and you only started getting that a few months ago, but the lender requires a two-year overtime history before they will count that as part of your income. All of a sudden, your loan has been declined and you don’t have that dream house.

What is pre-approval?

Let’s go back to the beginning. You place a call to a lender who explains to you that you’re about to go through the pre-approval process. In addition to answering some questions over the phone, you also submit proof of income (several months’ pay stubs, income tax returns and the like) and assets (bank account statements, retirement account statements, and so on). It might take several hours or even a day or two, but you emerge with a pre-approval letter that shows you have the means to purchase a house for as much as $500,000. So when you put that same offer down on that $489,900 house, and the offer is accepted, you can move forward with confidence. Your lender already has the vast majority of the necessary documentation, so finding an underwriter is much easier — and the closing time for the loan is much shorter, with no unpleasant surprises.

So what’s the difference? The key is in the documentation. You can get a pre-qualification letter more quickly than you can get a pre-approval letter, but you have a lot smaller chance of something bad happening to your loan application as you near closing with a pre-approval letter. A mortgage company willing to do the due diligence up front and look through your financials thoroughly helps you find issues with your credit approval that you can eliminate before an underwriter notices them. This is more time-consuming, but you will find that it is worth the extra work when you get the loan that you want closed in a fairly short amount of time.

Curious about the pre-approval process? Give one of our due diligence specialists at Amansad Financial a call. We will take a look at the documentation you already have, as well as your credit report, and make recommendations as to whether you are ready to start pre-approval or whether you should make some quick fixes to your credit report (challenging errors, asking creditors to delete your account if you pay in full, and so forth) before moving into the underwriting process. We have helped clients at just about all points on the credit spectrum, and we can help you and your family as well.