Pre-qualified vs Pre-approved: What’s the difference and why does it matter?

When you start thinking about buying a home, there’s lots of real estate terminology that gets thrown around. Fortunately, you don’t need to know everything, but understanding some mortgage terminology and processes will be helpful. For example,

Mortgage Pre-Qualification vs Mortgage Pre-Approval

The distinction can be the difference between an accepted offer and a rejected one. So, what’s the difference, and why is it important?

Mortgage Pre-Qualification

Think of pre-qualification as a financial snapshot. It simply helps you understand what you can afford based on your current financial situation, but doesn’t guarantee any financing from any lender.

Your mortgage loan originator will review your income, debt, assets, credit score, available savings, and estimated closing costs to confirm the amount and type of loan you’re eligible for. Based on this information, they may provide you with a pre-qualification letter. This pre-qualification is simply an approximation of what you can afford and what a financial institution might loan you.

You can also estimate what you’ll pre-qualify for using a mortgage calculator, which usually considers factors such as your income, assets, and debt.

Mortgage Pre-Approval

Mortgage pre-approval is when, based on your financial situation, a lender agrees to fund your mortgage with an agreed upon interest rate. Mortgage pre-approval is not a loan guarantee.

You’ll submit a loan application which will often include proof of employment, savings, debt information, current salary, position, and length of time with the organization.

The loan originator will tell you the maximum you can afford to spend on a home, your estimated monthly mortgage payment, and what your interest rate will be for your first mortgage term.

The institution will put a rate lock on the interest rate you agree on, which usually lasts between 60 to 120 days. Sometimes, if interest rates drop during the period, the lender will honor the change – but not always. Ask to be sure.

You should receive a pre-approval letter that includes the terms and conditions of the loan. The letter helps you shop for homes since you can be confident that, under these terms, the lender foresees no reason they would refuse your loan.

It’s important to note that mortgage pre-approval does not a guarantee that the lender will give you a mortgage loan for that amount. The approved mortgage depends on the value of the home you select and the amount you have saved for a down payment.

So, Which Should You Get?

Pre-qualification is useful in the early stages of home searching, and so it’s not a bad idea or a waste of time to get one.  

However, from a home seller’s perspective, a pre-approval letter is stronger evidence that you are a financially capable buyer, and therefore there is less risk that financing will kill the deal. Many sellers won’t even consider a buyer’s offer that doesn’t include a pre-approval letter. Doing the work in advance, and getting a pre-approval letter, can help you to present a winning offer, and to realize your real estate goals!

Are you thinking of buying a home in the Tampa Bay area?  If so, contact us, we’d be happy to help with your real estate needs!