Pre-Qualification vs. Pre-Approval: What’s the Difference?
Pre-qualification and pre-approval are two terms used in the context of mortgage lending. Here is a brief explanation of each:
Pre-qualification: This is the first step in the mortgage process. It involves providing a lender with a mortgage loan application and some basic information about your income, assets, and debt, so that they can give you an estimate of how much you might be able to borrow. Pre-qualification is usually a quick process and does not involve a detailed review of your documentation.
Pre-approval: This is a more formal process that involves a lender reviewing your credit history, income documentation, and other financial information to determine whether you are eligible for a mortgage and how much you can borrow. Once you’re pre-approved, you will receive a commitment letter from the lender stating that you are approved for a certain amount of money.
In short, pre-qualification is an informal estimate of how much you might be able to borrow, while pre-approval is a formal approval process that involves a detailed review of your financial situation. Pre-approval is generally considered more valuable, as it provides a more accurate estimate of your borrowing capacity and can help you to stand out to sellers as a serious buyer. Most listing agents will not accept a purchase offer without either a pre-qualification or a pre-approval letter.
Do I need a pre-qualification?
While pre-qualification is not required, it can be a helpful step in the homebuying process. Here are a few reasons why you might want to consider getting pre-qualified:
- It can help you understand your budget: Pre-qualification can give you an estimate of how much you might be able to borrow, which can help you determine your budget for house hunting.
- It can help you identify potential issues: Pre-qualification can help you identify any potential issues with your credit or financial history that may affect your ability to get approved for a mortgage. This can give you time to address these issues before applying for a mortgage.
- It can help you move quickly: If you find a house you love, having a pre-qualification letter in hand can help you move quickly to make an offer. This can be especially important in competitive markets where homes can sell quickly.
Do I need a pre-approval?
While pre-approval is not strictly required, it is highly recommended for several reasons:
- It gives you a more accurate estimate of how much you can afford: Pre-approval is a more detailed process than pre-qualification, so you will have a more accurate idea of how much you can afford to spend on a home.
- It helps you stand out to sellers: A pre-approval letter shows sellers that you are a serious buyer who has been vetted by a lender. This can make your offer more attractive in a competitive market.
- It can help you avoid disappointment: If you find the perfect home but then discover you cannot get approved for a mortgage, it can be a huge disappointment. Pre-approval helps you avoid this scenario by giving you a clear idea of what you can afford and what your financing options are.
- It speeds up the closing process: Pre-approval means you have already gone through much of the mortgage application process, so closing can happen more quickly once you find the right home.
Can I change lenders after pre-qualification or pre-approval?
Yes, you can change lenders after pre-qualification or pre-approval, although it may not be as straightforward as it sounds.
If you have only been pre-qualified, you have not formally applied for a loan yet, so switching lenders should be relatively simple. You can simply begin the pre-qualification process with a new lender and move forward from there.
If you have been pre-approved, the process of changing lenders is more complicated. You will need to let the original lender know that you are no longer interested in working with them and start the pre-approval process again with a new lender. You will need to provide the new lender with all the same documentation and information you provided to the original lender so they can complete their review and issue a new pre-approval letter.
Keep in mind that changing lenders could delay your closing date, as the new lender will need time to complete their review and underwriting process. Additionally, if you switch lenders late in the process, you may need to pay for a new home appraisal or other costs associated with the loan application.
Does prequalification or pre-approval cost anything?
In most cases, pre-qualification and pre-approval do not cost anything.
Pre-qualification is typically a free service offered by mortgage lenders that involves a preliminary review of your financial situation to determine your borrowing potential.
Pre-approval is a more detailed process that involves a thorough review of your financial documents and credit report, and it may involve a small fee. Many lenders, however, do not charge a fee for pre-approval.
Is my rate locked in after the pre-qualification or pre-approval?
No, your interest rate is not locked in after pre-qualification or pre-approval. Pre-qualification and pre-approval are both preliminary steps in the mortgage process that help you understand how much you may be able to borrow and what your interest rate might be based on the information you provide to the lender.
The interest rate you ultimately receive will be based on a number of factors, including your credit score, debt-to-income ratio, and other financial factors. These factors can change over time, which means that your interest rate may also change.
In order to lock in your interest rate, you will need to complete the full mortgage application process and work with your lender to finalize your loan terms. At that point, you may be able to lock in your interest rate for a period of time, typically ranging from 30 to 90 days, depending on your closing date, the lender and the type of mortgage you are applying for.
Remember that interest rates can change daily and can change quickly based on market conditions, so it is important to work closely with your lender to ensure that you are getting the best possible rate for your mortgage.
Can I get pre-approved with multiple lenders?
Yes, you can get pre-approved with multiple lenders. In fact, it is often a good idea to shop around and get pre-approvals from several different lenders so you can compare the rates, fees, and other terms of the mortgages they offer.
When you apply for pre-approval, each lender will review your credit report, income, and other financial information to determine whether you’re eligible for a mortgage and what your interest rate and other loan terms might be. This process typically involves a hard inquiry on your credit report, which can temporarily lower your credit score by a few points.
While getting pre-approved with multiple lenders may result in multiple hard inquiries on your credit report, it is important to note that credit scoring models are designed to account for rate shopping when it comes to mortgages. This means that as long as you apply for pre-approval within a certain timeframe, typically ranging from 14 to 45 days, the credit bureaus will treat all of the inquiries as a single inquiry when calculating your credit score.
How long do pre-qualification and pre-approval processes take?
The length of time it takes to get pre-qualified or pre-approved for a mortgage can vary depending on a number of factors, including the lender you’re working with, the type of mortgage you’re applying for, and how quickly you’re able to provide the lender with the necessary documentation.
Pre-qualification is typically a quick and simple process that can often be done in a matter of minutes or hours.
Pre-approval is a more involved process that can take several days to a week or more, depending on how quickly you’re able to provide the lender with the necessary documentation and how busy the lender is.
How long are prequalification and pre-approval good for?
The validity period of pre-qualification and pre-approval letters can vary depending on the lender and their policies.
In general, pre-qualification letters are typically valid for a short period of time, often ranging from 30 to 90 days. This is because pre-qualification is a preliminary step in the mortgage process and does not involve a full review of your financial documents or credit report.
Pre-approval letters are typically valid for a longer period of time, often ranging from 60 to 90 days or more. This is because pre-approval involves a more thorough review of your financial documents and credit report, and can provide a more accurate picture of your borrowing potential.
Even if your pre-qualification or pre-approval letter has not yet expired, any changes in your financial situation, credit score, or other factors could affect the terms of your mortgage offer. Keep your lender updated on any changes in your financial situation so that they can provide you with the most accurate information about your mortgage options.
How do I get pre-qualified and pre-approved?
To get pre-qualified or pre-approved for a mortgage, you will need to follow these steps:
- Research and choose a lender.
- Contact them to inquire about pre-qualification and pre-approval.
- Provide necessary information and documentation.
- Consent to a credit check.
- Receive your pre-qualification or pre-approval letter.
Please understand that pre-qualification and pre-approval are not guarantees of a loan, and the final loan amount and interest rate will depend on a number of factors and will be determined during the full mortgage application process.
It is possible to make an offer on a home without a pre-qualification or pre-approval letter, however most sellers and/or listing agents will require a pre-qualification or pre-approval letter before considering an offer, especially in competitive real estate markets.
Submitting a pre-qualification or pre-approval letter along with your offer can make your offer more attractive to the seller, as it shows that you have taken the necessary steps to secure financing and are a serious buyer. It can also give you a better idea of what you can afford, which can help you make a more informed offer.
Please reach out to me for additional guidance on pre-qualifications or pre-approvals at 312-296-4175 or email me at firstname.lastname@example.org. I lend in all 50 states and I am never too busy for your referrals!!
I have been in the mortgage industry since 1997 and I understand the anxiety that comes with making the most expensive investment of a lifetime. My objective is to be your advisor, to educate you and to make the mortgage loan transaction as transparent and as stress-free as possible. I enjoy establishing personal connections and work mostly by referral. I thoroughly explain the process and available options, and guide my clients to make choices that best fit their needs and financial goals. Once the underwriting begins I communicate regularly and keep my clients apprised of the loan status from the beginning through the end. My relationship with clients does not end at the closing table. You are my client for life and I am always available to answer your questions and provide you with guidance.