Pre-Approval vs. Pre-Qualification

If you're shopping for a home, it can be difficult to determine how much you can afford. Your bank might tell you that you've pre-qualified for a loan but what does that mean? How does it differ from being pre-approved? Understanding these terms is essential to figuring out your home-buying budget.

Pre-Qualification
If your bank tells you that you pre-qualify for a loan, it means that they've used your reported income and debt levels to make a general estimate about the size of mortgage you could afford. It's not a comprehensive assessment, and the bank won't seek out information to prove that the figures you provided are accurate.

While pre-qualification can give you a good ballpark range, it doesn't guarantee a mortgage in that amount. Without a full assessment and credit check, the bank can't tell you up front if you qualify. Additionally, when your bank pre-qualifies you, they assume you have excellent credit. This could be a problem, since your credit score impacts your interest rate which will have a large impact on your monthly mortgage payments (and how much you will be approved for).

Pre-Approval
The pre-approval process is more comprehensive and a bit more time-consuming. To get pre-approved, your lender will run a full credit check, and might speak with your employer. You may also need to provide tax returns, bank statements, your W-2 forms and proof of social security or pension payments.

If you are pre-approved, the lender will tell you exactly how much they are willing to loan you. At this time, they will also discuss interest rates and loan types that will best suit your lifestyle.

Which one is best?
Both pre-qualification and pre-approval have their advantages. However, if you're serious about buying a home, take the time to get pre-approved. Many realtors won't work with you unless you are, and the process itself can save you from surprises down the road.

For example, if you pre-qualify, your lender is making an estimate based on your own reported income. The type of income, however, might not meet the standards that your lender has in place. The pre-approval process will tell you this; a pre-qualification will not.

Another advantage of pre-approval is the credit check that your lender will run. Credit reports often include inaccuracies or missed payments you don't even know about. The earlier you discover these discrepancies, the more time you'll have to clear them up.

Pre-qualifications do have some advantages. If you're just starting to consider home ownership and have no idea how much you can afford, a pre-qualification can give you an idea. However, the more serious you are about buying a home, the more you should consider applying for pre-approval. Not only will it give you a better sense of your true buying power, but it will move you one step closer to home ownership.