Pre-qualified and pre-approved are some of the most common terms you may encounter when applying for a mortgage. Unfortunately, most people often use these two phrases interchangeably, not knowing they are not the same. For this reason, this article discusses everything you need to know about pre-qualification and pre-approval, covering their definitions, requirements, differences, and more.
What Does Pre-Qualified Mean?
During the earliest stages of the lending process, you may want to get some guidance on how much you will be able to borrow when looking to purchase a home. To do that, lenders and banks need to have a rough idea of where you stand financially and your base qualifications for a loan. Therefore, they may request you provide your financial information, including assets, income, debts, etc.
This process is known as 'being pre-qualified.' It can be conducted online, in person, or over the phone and is usually free.
What Does Pre-Approved Mean?
On the other hand, being pre-approved is usually the next step after pre-qualification. Here, you will be required to complete an application for pre-approval for the loan. You will then provide the lender with additional information and documentation along with your application.
The lender will then conduct a thorough financial background check based on the provided information. If your application meets all the requirements for that particular loan, the lender will offer a specific loan amount based on your financial background.
You will also find out more about the interest rate for the loan you have been pre-approved for at this stage. In addition, pre-approval allows you to begin searching for homes within the price range provided by the bank or lender. Finally, pre-approved means you can start negotiations with the seller because you have a higher chance of being approved for the mortgage.
Differences Between Pre-Qualified and Pre-Approval
As mentioned earlier, these two terms are often thought to mean the same thing but are entirely different. Below is why, but keep in mind there might be slight variations in requirements per lender.
Mortgage Application
In a pre-qualification, you don't need to fill out a mortgage application. Instead, the lender or bank wants to know where you stand financially. In a pre-approval, you need to fill out a mortgage application.
Application Fees
You do not typically need to pay any application fee during pre-qualification. However, some pre-approval applications involve an application fee.
Financial Background Check
A pre-qualification does not include a financial background check, but pre-approval does. The latter may analyze your bills, debts, credit history, and anything in between to find out whether you are eligible for a mortgage and the exact amount to offer.
End-Goal
The end goal of pre-qualification is to find out about you as the borrower, but a pre-approval focuses on finding out more about your finances. It involves analyzing documentation to prove the information you provided during pre-qualification.
Down Payments
You don't need to estimate your down payment during pre-qualification, but you do need it for pre-approval.
Loan Estimate
During pre-qualification, the lender will provide an estimate of a loan amount for you. However, the same does not apply for pre-approval; you won't find out how much the lender can offer until they've reviewed your finances.
Loan Amount
The loan amount offered during pre-qualification is just an estimate, which could change during pre-approval. On the other hand, the amount shown during pre-approval is usually the specific amount the lender will give.
Interest Rate
During pre-qualification, the lender won't tell you anything about the interest rate. But, pre-approval involves disclosing the interest rate after the lender establishes a certain amount they are willing to part with based on your financial background.
Key Takeaways
Pre-qualification and pre-approval have two different meanings, even though they may sound almost the same. During pre-qualification, you'll provide basic information, such as your income, down payment amount, desired mortgage amount, and so on.
But, on the other hand, the pre-approval process requires copies of your pay stubs as proof of income, financial background check, bank statements, down payment amount, desired mortgage amount, tax information, and so on.
Another essential thing to note is that pre-qualification comes before pre-approval. Therefore, the lender may provide an estimate of what they can offer based on the information you provided during pre-qualification. The amount may change during pre-approval after reviewing your financial records.
Lastly, pre-qualification provides a rough idea of how much mortgage you may be eligible for, while pre-approval gives you the confidence to engage sellers, knowing the lender has a certain pre-approved amount to offer.