Loan Pre-Approval vs. Loan Pre-Qualification - What's the Difference?

If you are looking to buy a house, you have probably heard that it is always good to get ‘pre-approved’ before seriously beginning your home search. If you are like me, the concept of getting pre-approved makes sense: you know how much you can afford, you know how much a lender is willing to loan you, and most importantly, you are confident that when you submit an offer, it will not fall through because you couldn’t get the loan you needed.

For people not involved in the real estate or mortgage industry on a daily basis, the concepts of ‘pre-approval’ and ‘pre-qualification’ can sometimes be used interchangeably – incorrectly so. In fact, if you are involved in a competitive home bidding situation, the difference between pre-qualified and pre-approved can be the difference between whether your offer is accepted or rejected. With so much work and energy riding on your purchase offer, it is in your best interest to know the difference between these two concepts.

Here is a quick overview of both concepts. To learn more about your specific situation, contact your mortgage professional or you can visit our partner’s website, E-Loan.

Loan Pre-qualification

How it works:
A quick and casual conversation with a lender, where the lender asks you a few questions about your finances (income, monthly expenses, etc…). The lender will then provide you with a high level estimate of how much money they might lend you - assuming that all of your information is true and accurate. While you will get a ‘pre-qualification’ letter, this letter in no way bounds the lender to underwrite your loan. If you do decide to apply for a loan through this lender, the lender will put you through their normal loan qualification process, which will involve a detailed background and finance check. It is at this time that all of your information will be thoroughly verified.

Pros:
- Quick and easy – usually takes no longer than 15 minutes
- No official background check or verification of finances – at least initially
- Provides you with a rough estimate of how much you might be able to borrow

Cons:
- Carries little weight, since the lender is not bound to underwrite your loan
- Provides a ‘rough’ guesstimate of what the lender might lend you
- Not recognized by a home seller as a ‘plus’ in the offer process and would be considered a ‘negative’ relative to other offers which have ‘pre-approved’ buyers

Conclusion:
From a seller’s standpoint, a pre-qualification letter is barely worth the paper that it is printed on, since it does not provide any assurances to the seller that you (and your finances) can truly afford to purchase the house. It is still very possible that you may not qualify for the necessary loan when you go through the official loan application process.

Loan Pre-approval

How it works:
A formal process where the lender will ask you questions about your finances and verify that your information is accurate. This can include income documentation, background checks, and all the other factors used in evaluating a loan application. While this may seem like a lot of effort to go through before you have even found your house, you will eventually have to go through this process if you ever find ‘the’ house and need to apply for financing. With loan pre-approval, once a lender approves you, the lender is then bound to provide you with that loan. As a buyer, pre-approval is as good as having the money in your pocket.

Pros:
- You know exactly how much you can borrow
- You have an advantage in multiple offer situations, since your loan and finances have been validated and approved by a lender

Cons:
- Takes more time upfront (though you would eventually have to go through this step to obtain a loan anyways)

Conclusion:
From a seller’s standpoint, a pre-approved buyer is highly desirable. Pre-approved buyers give the seller confidence that offers on their home are serious and will not fall through. In multiple offer situations, buyers who are pre-approved are viewed more positively than buyers who are only pre-qualified.

In a nutshell, those are the differences. Again, for specific questions about your personal situation, contact a mortgage professional – they can explain all of this in minute detail.

Myron

Read these articles to learn more about Bay Area mortgages, San Diego mortgages, or Seattle mortgages or search for homes.

Comments

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