Pre-Qualified vs. Pre-Approved: What’s the Difference?
Pre-qualification estimates how much you may be able to borrow, based on an informal evaluation of your finances. Pre-approval carries more weight and requires documentation. Pre-qualification and pre-approval sound similar, but typically only one, pre-approval, will put you ahead in the homebuying competition.
What is a Mortgage Pre-Qualification?
Generally, in the pre-qualification phase, you describe your credit, debt, income, and assets. The pre-qualification application processes varies by lender. Based on this overall financial picture, the lender estimates how much you may be able to borrow. Some lenders will also do a credit check. You can get pre-qualified over the phone, online, or in person.
Getting pre-qualified can give you a sense of your financial readiness and introduce you to various mortgage options. It’s often a good step for first time home buyer's who are just testing the water and aren’t ready to jump in.
What is a Mortgage Pre-Approval?
A mortgage pre-approval takes the process to the next level. Pre-approval requires you to provide proof of your financial history and stability. The lender will verify your income, employment, assets and debts, and will check your credit report.
The initial documentation you will need to provide is:
1) Your last two years W-2s.
2) Most recent 30 days pay stubs (3 paystubs if paid bi-weekly to complete 30 day period).
3) Last two years Federal tax returns (all pages/all schedules).
4) Summary of your assets and your total monthly expenses.
5) If you already own real estate, a copy of your mortgage statement and home insurance policy.
If you satisfy the requirements, you will get a pre-approval letter, which states the amount and type of mortgage the lender is willing to offer, along with the terms. You can show the letter to sellers and their real estate agents when making offers on homes.
A pre-approval offer isn’t a guarantee, but it shows you’re a serious buyer, which can give you leverage in a competitive market.
Skip Pre-Qualification and Get Pre-Approved
You DO NOT have to get pre-qualified first. If you know you are financially ready to buy and start home shopping, I recommend you get pre-approved. A pre-approval will strengthen your offer and you will close on the home much faster.