If you’re in the market for a home and will need financing, chances are you’ve heard the terms pre-qualification and pre-approval.
A lot of times these terms—which are actually very different—are unfortunately used interchangeably.
So, what’s the big difference, and between pre-approval vs. pre-qualification, what will work for you? Learn what these two terms mean and understand their differences so you’ll know what makes the most sense for you.
What is a pre-qualification?
For many people, getting pre-qualified is often the first step in the home search process. In a nutshell, a pre-qualification is an estimation of what you can borrow. Typically, a pre-qualification can be done on the phone or in person and takes very little time.
Unlike a pre-approval, a pre-qualification is only an approximation of what you can afford. You won’t hand over bank statements, W-2s, tax returns, etc. during the pre-qualification process. Your lender will simply use the information you provide to come up with an estimate of how much you can qualify to borrow.
What is a pre-approval?
A pre-approval scrutinizes every aspect of your creditworthiness; everything from your income, debt, assets, and credit report will be reviewed. A pre-approval determines exactly how much you may borrow under a specific mortgage program.
Basically, a pre-approval is completing a full loan application, providing complete documentation, and having the application reviewed by an underwriter before contracting for a home purchase.
Once you’ve found the home you wish to purchase, your pre-approval will become a full mortgage loan commitment—subject to a fully executed purchase contract and the completion of an appraisal.
A pre-approval also fast-tracks your closing process, since your lender already has the bulk of the paperwork required to execute the loan.
What documents do you need to complete the pre-approval process?
When the pre-approval process is complete, you’ll receive a statement from your lender detailing exactly what you are qualified to borrow.
Because this process is more in-depth, your lender will need several documents from you to complete it. Be ready to provide:
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Income information: If you’re a W-2 employee, gather your last two pay stubs.
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W-2s and tax returns: You’ll need your last two years of tax returns and W-2s.
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Asset verification: Lenders want to ensure you have the assets to cover your down payment and monthly mortgage payments. Provide at least two months of statements for any account used for your down payment. If part of it is a gift, that must be sourced too.
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Driver’s license and Social Security card: These are needed to verify your identity and run a credit check.
What’s best for you?
If you’re just dipping your toes into the home-buying process, a pre-qualification may be right for you. You can get a rough estimate of what you might be able to borrow and use that as a baseline while browsing homes casually.
Conversely, if you’re serious about purchasing a home soon, a pre-approval is absolutely the best way to go. As the number of affordable homes for first-time buyers continues to be scarce, you may find yourself in a multiple-offer situation—and having a pre-approval tells sellers you’re a serious buyer.
Bottom line
While pre-qualification and pre-approval are often used interchangeably, they are very different. Even if you’re not quite ready to buy, going through the pre-approval process can help you identify any potential issues early and give you time to address them before purchasing a home.
Ready to make your move? Talk with a Mortgage Consultant or get pre-approved with Allen Tate Mortgage today.
