You might be wondering to yourself, or out loud to google, ‘what’s the difference between pre-approval and pre-qualification?’ And it’s not a bad question to have seeing as though most people use the words pre-approval and pre-qualification interchangeably when it comes to buying a house.
But the truth is one is much better to have than the other when it comes to looking like you’re a serious buyer.
Let’s back up for a second. What am I even talking about with this pre-approval and pre-qualification stuff? I’m talking mortgages people! Pre-qualification and pre-approval for a mortgage to buy a house!
Here’s a fun fact, did you know that up until 1934 home loans didn’t really exist?! Less than 40% of people owned their homes! Most lenders were only loaning 50% of the purchase price and the repayment period was 3-5 years with a balloon payment at the end! Fifteen and 30 year home loans didn’t exists for many more years.
So we all should be a little grateful for these 30 year loans everyone takes out to buy a house!
I’ll go over similarities between pre-approval and pre-qualification below, but I think it’s more important to know the differences first. In some real estate markets not having the right letter could lose you a house! (Okay, I’m being dramatic, but just make sure you’re real estate agent knows your market!) Like I said above, most people use the terms interchangeably but they really aren’t the same thing.
Pre-Qualification
A pre-qualification simply means you spoke with a lender and based off the information you provided, the lender said ‘okay, I think you’ll be approved.’
There usually aren’t any bank statements, W2’s or tax returns handed in for an underwriter to review and the initial questionnaire doesn’t dive deep into all your financials.
A pre-qualification also does not require a hard inquiry on your credit report! Yay. Hard inquiries negatively affect your credit score and if you’re already border line in the credit department it could mean the difference between being approved later or not. I personally use the Credit Karma and Credit Sesame websites to track our credit scores. This way I can verbally tell loan officers what are score is so they have a better idea of our qualifications without having to run our credit until absolutely necessary.
So basically a pre-qualification is an educated guess as to what you might be approved for. And as long as you’re honest with the lender and no surprises show up on your credit check later, you will probably be approved for a loan when the time comes if you’ve been pre-qualified.
Pre-Approval
With a pre-approval you have a more precise figure on what the lender is willing to lend you because at this point you’ve likely turned in bank statements, w2’s, taxes, your first born, and other financial information. A pre-approval means the lender looked at all your paperwork and sometimes even an underwriter will do a preliminary overview as well.
Another important thing to note is that a pre approval usually requires a credit check while a pre qualification does not. Credit checks usually only affect scores by a few points but if you are comparing three or four mortgage companies it can add up.
A good way to think about the difference between pre-approval and pre-qualification is that pre-qualification is the first step and pre-approval is the second (with approved being the last!) You can also look at pre-qualification as a good guess and a pre-approval as more like a promise (although no party is tied to one another at this point yet.)
In most markets a pre-approval will make you look like a stronger buyer when you put an offer in on a home because it shows you’ve taken the additional steps (and committed to a credit check) and are more ready to buy a house than someone with just a pre-qualification letter from a mortgage company.
And don’t worry, you aren’t stuck with the lender that pre-approved you, you’re always free to shop around! (Although most people wind up using the lender they originally got pre-approved with, funny how that works.)
Believe it or not all real estate markets are different. There are markets out there where there is no difference in whether you have a pre-qualification letter or a pre-approval letter. They both technically say what you’ll most likely be approved for and unless a buyer lied for the pre-qualification the pre-approval should follow easily.
There are some companies out there, and I’ve worked with one, where they don’t distinguish between pre-qualification and pre-approval. They have one letter stating whether or not they will fund you and for how much. I prefer that because it works just as good as a pre-approval but they don’t do a credit check until you find a house. If you wind up using a company like this make sure to be totally honest up front about all your finances and credit score or it could haunt you when it comes time for the guy to underwrite the deal.
Both a pre-approval and a pre-qualification help determine what price range a buyer should be looking in. This is a good one because nothing sucks more than falling in love with a house you can’t afford! Need an even better reason to get pre-qualified or pre-approved? Some real estate agents won’t work with buyers unless they at least have a pre-qualification! Say what!?!
So that’s my spiel on what’s the difference between pre-approval and pre-qualification when it comes to a mortgage. How do these things work in your local real estate market?
If you’re interested in buying a fixer upper, check out this article I wrote about 5 ways you may not have thought of to find a house!
If you’re interested in selling your home, read this post about how millennials are changing real estate.
Subscribe!
Subscribe!Be sure to reach out on Instagram; Facebook; or Pinterest; and subscribe to this blog to be notified when new blog posts are up – who would want to miss those!?! (And if you’re a fellow blogger submit your website! I love finding new blogs to read, pin and share!!! It’s so hard to find a good quality blog nowadays, you know what I’m saying?)
[contact-form-7 id=”3255″ title=”Contact form 1″]
