Whether you are new to the mortgage process or a veteran of the industry, the terms used in the initial steps of getting a loan can at times be confusing and misleading. Understanding the difference between a pre-qualification and a pre-approval helps determine how much house you can afford, and if you are qualified to get a loan. Below, we break down the difference between two very similar and equally important terms:
The pre-qualification is a less involved process than the pre-approval and can be done over the phone or online. As the borrower, you provide the lender your overall financial picture including debt, income, and assets. It does not involve an analysis of your credit report or a close look at your ability to purchase a home. The pre-qualification letter allows you to explore your mortgage options with a lender and ask any initial questions.
A pre-approval letter comes from the mortgage company you are working with and is essentially a commitment that you have a loan approved for a certain amount of money. This letter is required before a full mortgage loan approval and includes the following:
- Credit check
- Income/employment verification
- Financial obligations such as credit card balances
- Copies of W-2s and bank statements
Once you are pre-approved, you can move forward with looking for a home knowing you have a conditional commitment. This gives you leg up on an offer from somebody who has not been pre-approved.