When you start looking into buying a house, you’ll likely hear that you should make sure you’re pre-qualified or pre-approved for a mortgage. The terms are often used interchangeably, but they don’t actually mean the same thing.
A mortgage pre-qualification is an estimate of the amount a lender will let you borrow. The lender’s estimate is based upon information you provide, including your income, debt, and assets. A lender generally does not check your credit report in pre-qualifying you for a mortgage. In fact, you may be able to complete the pre-qualification process over the phone, as you will not need to provide any supporting documentation to the lender. A pre-qualification letter from a lender is not a commitment to lend you money.
By contrast, a mortgage pre-approval requires more effort. You may have to complete an actual mortgage application and allow the lender to perform an extensive financial background and credit check. You will likely have to submit documentation to support your stated income, assets, and debts, and pay a fee. This in-depth investigation allows the lender to provide you with a pre-approval letter that is essentially a conditional commitment to lend you money up to a specific amount.
Although the pre-approval letter is not a guarantee that you will be able to take out a mortgage with the lender, the pre-approval can make you a more attractive buyer because there is a much smaller chance that a sale will fall through due to your financial situation. All borrowers who will be signing the mortgage papers should be pre-approved together.
A mortgage pre-qualification can be very helpful at the start of your home-buying process because you can use the pre-qualification estimate to determine your budget. However, once you are serious about buying and ready to start making offers, you may want to go through the process to obtain a pre-approval letter – in fact, in a hot real estate market, a pre-approval letter may be a requirement to be taken seriously by agents and sellers alike, as they will not want to wait to see if you can qualify for a mortgage.
You don’t have to take out your mortgage with the lender who pre-approved you, so you can still shop around for the best rate until you’re ready to actually make an offer. After all, if one institution is willing to lend you money, another institution likely will as well. (But the process should be faster and require less paperwork if you go with the lender who has already pre-approved you.)
Note that some people use the terms pre-qualification and pre-approval interchangeably. Depending on the circumstances, you may need to ask for clarification to ensure that you are on the same page. You wouldn’t want to lose the chance to buy the house of your dreams based on a simple misunderstanding!