Mortgage Pre-Approval vs. Pre-Qualification – What’s the Difference?

Shopping for homes is exciting until one needs to secure financing to purchase. Even with savings, most Americans can only buy a house through a mortgage loan. In the fourth quarter of 2022, the US residential mortgage debt reached $11.92 trillion.

As home prices continuously soar and interest rates hit historically high levels, getting a mortgage loan becomes increasingly tricky. Obtaining an estimate of how much you can comfortably spend on a home is an excellent starting point. Doing so shows your commitment as a serious buyer.

That’s where mortgage pre-approval and pre-qualification come into play. Both are valuable steps in the mortgage application process. While they’re often used interchangeably, there are critical distinctions that every homebuyer should understand.

Are you in the process of applying for a purchase mortgage or home refinance? Read on to learn the difference between getting pre-approved and pre-qualified and how they affect your chances of purchasing a home.

The Differences Between Getting Pre-Approved and Pre-Qualified

Obtaining either pre-approval or pre-qualification means that a lender has examined your financial situation and verified that you meet specific criteria for their loan approval requirements.

While both terms are similar in many ways, differences exist between getting pre-approved and being pre-qualified. Understanding the distinctions between pre-approval and pre-qualification can help you decide which path to take as you start your home-buying journey.

Requirements

The information required in the pre-qualification process is limited. Typically, the lender only asks about your basic financial information to give you an estimate of the mortgage amount you will qualify for. In contrast, mortgage pre-approval demands more information and documentation. Some lenders may even require you to fill out a mortgage application during pre-approval.

Timeframe

Since getting pre-qualified doesn’t involve an in-depth look at your finances and credit report, the pre-qualification process typically only takes a few minutes. Meanwhile, most lenders take 7 to 10 business days to process a mortgage pre-approval, though some may only take one to three business days.

Application fee

Pre-qualification can be performed online or over the phone, so you don’t usually have to pay application fees. There’s also no cost involved in pre-approval applications. However, some lenders may impose an application fee, which can amount to several hundred dollars.

In some instances, lenders may waive application fees to attract more borrowers. Others may integrate the payments into the closing costs. It’s critical to inquire about these fees before submitting your pre-approval application.

Credit inquiry

Mortgage lenders will perform a credit check to assess the likelihood of homebuyers making timely loan payments.

With pre-qualification, the credit check is limited to a soft credit inquiry. It enables lenders to view your credit report without affecting your credit scores. On the other hand, a pre-approval requires a hard credit inquiry, which will remain visible on your credit reports for a period of two years.

Accuracy

Since pre-qualification doesn’t involve in-depth financial background checks, it’s less reliable than pre-approval. The information that pre-approval provides is more accurate than pre-qualification.

For instance, the lender only gives you an estimate of the loan when you get pre-qualified. However, pre-approval outlines the loan amount for which you will be eligible, along with the interest rate information.

Advantages

Since pre-approval is significantly more precise about the amount you can borrow and the corresponding interest rates, it gives you more confidence to negotiate with sellers.

Pre-approved buyers are more likely to close on the home at the agreed-upon price. Unfortunately, many skip the pre-approval process. However, avoiding making concrete plans solely based on your pre-qualification status is essential.

Getting pre-qualified can convince sellers that you’re a serious buyer. However, getting pre-approved is paramount to stand out from other prospective buyers in today’s highly competitive housing market. Pre-approval gives sellers assurance of your capacity to get a mortgage.

To better comprehend the distinctions between pre-approval and pre-qualification, let’s look at how they work and the steps involved in each process.

Understanding How Mortgage Pre-Approval Works

A mortgage pre-approval is one of the most valuable steps when securing a home loan.

Numerous lenders claim that your chances in a highly competitive housing market are slim without it. But what exactly does getting pre-approved for a mortgage mean, and how can it help distinguish you from other potential buyers?

Obtaining a mortgage pre-approval doesn’t guarantee that you’ll secure a loan for the home you want to purchase. It’s only a written document from a…