Pre-Approval vs. Pre-Qualification

What Are the Differences?

Understanding the differences between being pre-approved and pre-qualified can save you a lot of headaches on the search for rental properties.

While they have similarities, the two terms are quite different. They carry different weight when it comes to securing properties. We’ll discuss the distinct differences between the two, when you should choose one over the other, and the necessary steps needed to complete each.

Understanding the Differences

Pre-Qualification

Getting pre-qualified for a mortgage involves providing basic financial information to a lender through an in-person visit or online submission. The lender will typically ask for annual income, debt, and evaluation of your credit score. In addition, they may ask questions about the purchase price and estimated down-payment. The lender will utilize this information to provide you with an approximate mortgage that to which you may quality.

If you are beginning to pick up on that pre-qualification doesn’t carry a lot of weight, then you are correct. Remember, pre-qualification only provides a rough estimate of what mortgage you would qualify for because the lender hasn’t looked extensively through your financials and vetted your payment and credit history.

To better provide you with an exact mortgage, the lender will suggest you get a pre-approval.

Pre-approval

Unlike pre-qualification, where you are only asked to provide basic financial information, a pre-approval requires the applicant to submit extensive financial documentation to ensure the lender has a full picture of their “creditworthiness”. Typical documentation includes tax returns, consecutive pay stubs, investment account details, bank statements, outstanding loans, and potentially more.

Additionally, the lender will typically require a loan application submission as well as a hard credit check. While there is still a difference between pre-approval and being approved, the lender is essentially stating that you will likely be approved for a certain loan amount – but it’s not a guarantee. Full loan approval is only granted after all documentation goes through lenders underwriting.

How Do You Choose?

There are some advantage and disadvantages of going through the approval process for both options. Understanding these might help provide clarity on which to choose.

Pre-Qualification: Advantages

• Quick – generally within minutes
• Typically, free
• Soft credit check
• Limited documentation needed

Pre-Qualification: Disadvantages

• Very rough estimate
• Not nearly as accurate

Pre-Approval: Advantages

• Prove seriousness in buying
• Most accurate estimate

Pre-Approval: Disadvantages

• Lengthy process – weeks to months (30-60 days)
• Takes significant documentation
• Hard Credit Check
• Fee involved

So, Which One Do You Choose?

There are a couple of considerations when determining whether to seek out a pre-qualification vs a pre-approval letter.

How serious are you about buying?

In today’s market, where properties seem to be off the market as soon as they are listed, it’s important (if not essential) to have a pre-approval letter. In fact, many realtors won’t even work with you unless you are pre-approved. Because a pre-approval is a detailed evaluation of your finances it will provide both realtor and seller confidence when you put in an offer.

Bad Credit? Inconsistent Income? Debt?

If you are in the market but trying to figure out what you will qualify – it might be in your best interest to go with a pre-qualification. You avoid a hard credit check, don’t have to pay for the evaluation but still end up with a rough estimate on what you could qualify for. Once you have a better understanding of what your mortgage qualification would be, you can feel more comfortable shopping for properties.

Unsure about qualifying?

If you aren’t sure about whether you would qualify or have debt with a moderate credit, it might be in your best interest to get pre-qualified. Then, move to pre-approval as you get more serious. Remember, pre-qualifying doesn’t cost you anything – in terms of money or credit score. This could save you a lot of wasted time (collecting financial information) and money, only to find out you don’t qualify for a mortgage.

Getting Pre-Approved

If you are a serious buyer and eagerly trying to acquire real estate, it is imperative that you are pre-approved. This is especially true in today’s market.

It will send a serious message to both realtor and seller in addition to helping ensure there are no issues if you put the property under contract.

The following are a list of documents that are typically required by the loan officer when submitting a pre-approval letter:

• Bank statements
• Investment documents
• Loans, lines of credits, mortgage statements
• Tax returns (typically two years’ worth)
• Pay stubs (typically 2-3 from current employers)
• Licenses (Personal Identification)
• Bankruptcies
• Explanation of credit inquiries

An important part of the pre-approval process is determining an individual’s debt-to-income (DTI) ratio. Lenders will utilize DTI to determine whether you are an appropriate candidate to lend to. As a general guideline, the highest DTI that will qualify you for a mortgage is 43%, with most lenders preferring a ratio lower than 36%.

To calculate a DTI, you simply divide your total monthly expense by your gross income. For instance, if our total gross income is $8,000 with total expenses of $2,500 (mortgage, car loan, student loan), then your DTI will be 31.3% ($2500/$8000).

Evaluating DTI provides lenders an assessment of an individual’s creditworthiness. Based on the DTI it can demonstrate whether you have money remaining or you have limited money to save or spend after paying your monthly bills.

The Key Takeaway Points

Pre-qualification and pre-approval have vital roles in the acquisition of real estate.

It is important to understand the distinct similarities and differences to ensure you choose the appropriate one for your current situation.

Getting pre-qualified can provide homeowners clarity on if they can afford a home and what mortgage they can potentially qualify for.

Getting pre-approved allows buyers more weight with both realtors and demonstrates a more serious buyer. It can provide a more accurate assessment of what they qualify for and help aid any anxiety once an offer is accepted.