Pre-Qualification Versus Pre-Approval: Are They Worth It and What are the Differences?

Estimated reading time: 8 minutes

Whether you’re buying your first home or your third, it’s important to know the differences between pre-qualification and pre-approval. While some people may use the terms interchangeably, both are steps with their own advantages in the mortgage process. By understanding what these terms are, when to use them, and why they matter, you’ll be able to move through the home financing journey with confidence.

What is Pre-Qualification?

Pre-qualification is a process that indicates whether a lender could approve you for a mortgage, how much money you can borrow, and what loan products you may be eligible for if you formally applied.

Simply put, it means that you may satisfy a lender’s general criteria for a mortgage, based on your self-reported financial information, such as your income, assets, credit, and debt.

When Should You Use Pre-Qualification?

In the early stages of homebuying, pre-qualification can be useful in creating a comprehensive homebuying budget. You’ll have an estimated loan amount and loan terms, which can help you to know whether you may need to improve your finances or credit for more favorable terms.

The process can be handled relatively quickly, usually through a short phone conversation or over e-mail. This can be ideal for borrowers who are moving to a new area or out of state. If you’re unaware of an area’s average home prices and mortgage rates, a pre-qualification from a local lender can provide insight about what to expect from home prices and interest rates in the area.

Additionally, as a pre-qualification is not a commitment to using the lender, a buyer can use pre-qualifications from multiple lenders to shop around for a loan package that works for them. You can make your own decision about which lender you choose, as each will give you their own estimates about what you may qualify for. This is especially helpful for first-time homebuyers who may not have a preferred lender.

What is Pre-Approval?

A pre-approval occurs when you participate in a thorough financial review to verify your conditional mortgage approval. It provides written proof from a lender that you have the financial means to qualify and pay back the loan you’re applying for.

When compared to a pre-qualification, a pre-approval provides a more precise look into your mortgage readiness. It shows sellers that you’re a serious buyer and on track for full approval. In fact, you may only be subject to contracts and an appraisal because your file has already been underwritten. This conditional approval speeds up the final mortgage underwriting process.

When is it Best to Use a Pre-Approval?

Before you make an official purchase offer on a home, be sure to obtain a pre-approval letter. This letter can help you better understand exactly how much you qualify for, what programs are available for you, and at what rate.

In the same vein, this letter can enhance your purchase offer. It shows the home seller that you have the ability and the funds to consistently make monthly payments over the length of the loan. In a tight market that favors sellers, the inclusion of a pre-approval could be what sets you apart from competing offers.

What Happens to My Credit During Pre-Qualification and Pre-Approval?

Because pre-qualification is based primarily on your self-reported information, your credit will most likely be unaffected. McGlone Mortgage are only required to pull a Pre-Qualification Soft Pull credit report. In most cases, this process does not require a hard pull of your credit. The pre-qualification process can usually be completed in a variety of ways, such as a short phone call or an email exchange.

On the other hand, pre-approval is a detailed examination of your information. To achieve this, your lender may perform a hard credit pull. This kind of credit pull may affect your credit by lowering it by a few points. Because of this, written consent is necessary from the borrower.

During pre-approval, your credit report and numerical score will be looked at to ensure your debt-to-income ratio can support a large loan, like a mortgage. This ratio is used by lenders to determine if you will be able to pay your monthly mortgage payments by examining how much money you owe (debt) and comparing it to how much money you earn (income).

Your lender will also look at your tax returns, bank statements, and pay stubs. All this financial information is used to assist your lender in determining exactly how much money they may lend you and at what interest rate.

How Long Do Pre-Qualifications and Pre-Approvals Last?

To know how long your pre-qualification or pre-approval is valid, it’s best to speak with your mortgage lender. McGlone Mortgage, your pre-approval letter is valid for 90 days. That gives you approximately three months to put in and close on a home.

However, don’t stress if it takes you longer to find a home. Now that you are in the process, your lender may just need to see updated documentation to issue a new letter.

What Happens After You’ve Been Pre-Qualified or Pre-Approved?

Once you have your pre-qualification or pre-approval, it’s time to get serious about securing the home you want. Remember to be mindful of how long your letter will last so you can strategically plan your next moves.

Work With Your Budget

Already, your pre-approval will give you the upper hand against your competition. You’ll have a jumping off point for your budget, backed up by your financial profile. This way, you’ll be able to shop in your desired price range without worrying if you’re looking at a house that you can’t afford.

Utilize Your Team

Before you make an official offer, be sure you have a Real Estate Agent on your homebuying team. Then, make sure they’re on the same page with your Licensed Loan Originator (also commonly called an LO). Your LO can also answer any questions or concerns you have about what’s in your pre-approval letter. While your LO is your sidekick during the mortgage financing process, your Real Estate Agent will assist you through the ins and outs of the home search, including creating a winning offer with negotiations in your favor.

Be Flexible, but Patient

The homebuying process can feel a lot like you’re rushing around just to wind up waiting for the seller or waiting for processes to finish. During these times, it’s best to breathe and leverage the experts on your team.

In addition to creating an offer too good to ignore, you’ll have your chance to negotiate much more than just the home’s purchase price. You may be able to also negotiate repairs and upgrades, closing costs, or contingencies.

Your Home Financing Guides

Neither a pre-qualification nor a pre-approval are a loan guarantee. However, both can help you more easily purchase a home you love within your budget. From the moment you start the pre-qualification or pre-approval process until closing, a Licensed Loan Originator from McGlone Mortgage will be by your side to help you through the mortgage process! Contact us today to learn what you qualify for and begin the steps to reaching your home financing goals.