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There are quite a few steps involved in home buying. Of course, you already know you’ll have to find a house you like. To do that, you may have to review photos online and see the home in person. Plus, there are financial steps to get you ready—like saving for a down payment and getting a mortgage. And thinking about the mortgage may have you wondering about pre-approval vs pre-qualification.

Glasses sitting on top of paperwork with fine print

The bank wants to know

Let’s say you’re on the brink of your great adventure—buying your first home. And you know the next stop will involve looking at houses and trying to find one you that’s right for you. Once you’re ready to buy, you’ll need money. So, you know you need to get the ball rolling for a mortgage.

A mortgage involves a lender providing a large amount of money for you. So it certainly makes sense that the bank wants to know about you. After all, if you were lending money to someone, you’d certainly want to know whether they’d be able to pay it back, wouldn’t you? Really, the bank is no different, they want to know that you’re in a reasonable financial position.

The seller wants to know

In addition to the bank, there are at least two other parties that could want to know about your financial position. First, there’s the home seller. Put yourself in their shoes—they’re about to sell a valuable item to someone they might not even know. And they don’t want it to fall through because that buyer can’t actually come up with the money. More on this a bit later.

Then, there’s also you. As you’re starting out in your search for a home, you may feel behind the 8-ball. You don’t really know too much about home buying from a financial perspective. You know what styles and types of homes you do and don’t like. But what you don’t know is how much home will you be able to afford with the help of a mortgage.

Enter pre-approval & pre-qualification

So, you’re in this situation where the homeowner wants to know if you’ll have the money to buy their house. You also want to know how much house you’ll be able to afford. And on top of that, there are things the lender wants to know. Before they provide you money, they want to know enough about you that they’re comfortable lending.

Pre-approval and pre-qualification could help out here. You provide information to the bank and the bank seeks out information about you. The end result is that you get a letter that says you’re pre-qualified or pre-approved to get a loan. (If you are indeed pre-qualified or pre-approved, that is).

Now, you have the advantage of knowing more about how your financial picture relates to buying a house. Plus, you can demonstrate to home sellers that you’re in a position to buy.

What’s the difference between pre-approval vs pre-qualification?

Naturally, at this stage, you may be wondering about the differences between these two things. Here’s where it gets complicated. These terms—pre-approval and pre-qualification—aren’t as clear-cut as we might wish. Some people may use them interchangeably while others may use them as two distinct elements.

So even though we might like to define and make distinctions for our own sanity, that’s only useful to a point. Think about it—let’s say you study up on pre-approval vs pre-qualification. Finally, you’re sure you understand them and have the differences straight in your own mind.

Curiously confusing

Then, you head into a lender’s office in your area to talk about your next steps. To your surprise and confusion, it turns out that the lender uses the term differently than your understanding.

However, even if the lender does use the term differently than what you expected, it’s not cause for panic. The Consumer Financial Protection Bureau says “The important thing is that the letter you receive provides enough information for sellers in your area to take it seriously. The best way to make sure that the letter you have will serve its purpose is to ask a local real estate agent.”

Is there a significant difference between the two?

So you’re wondering whether there’s a significant difference when it comes to pre-approval vs pre-qualification. Well, it could depend on who you ask. On the one hand, you have the Consumer Financial Protection Bureau. They say, “There’s not a lot of difference between a pre-qualification letter and a preapproval letter.”

Then, there’s Lisa Kaplan Gordon for Realtor.com. She says, “pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.”

With the knowledge that it’s tricky to nail these two down concretely, let’s look at some possible differences. Just know that these could be relative—all situations might not look the same.

Pre-qualification

Imagine you’re sitting on the couch in your apartment or rental ready to dive into your homebuying journey. It’s been a long time coming, it seems to you. It’s a goal you’ve been nurturing for quite a while.

Understandably, you’re getting excited and “chomping at the bit,” so to speak. So you pop up off your couch and make a beeline for your front door. Next, you head straight to a lender because you feel you must know a little something to get a baseline. What kind of houses should you even be considering? What kind of ballpark dollar figure might you be looking at for a loan?

In this case, let’s say the lender helps you get pre-qualified for a loan. Prequalification could function as a sort of first stop. You could imagine it as a lower level checkpoint, compared to pre-approval.

The lender may not check your credit at this stage. And the lender could go mainly on the information you provide. Thus, it makes sense that this lower gateway could be less certain than pre-approval.

Pre-approval

Pre-approval can help things get more specific and more certain. Here’s where you may get an actual loan amount (though it’s still not an airtight commitment). Plus, you may get a better understanding of the interest rate you’ll be paying.

The pre-approval process could include a credit check. And your lender may dig deeper to know more about your financial picture. Plus, with pre-approval, you may have to pay.

Pre-approval vs pre-qualification: Some differences

According to Investopedia, here are some possible differences when it comes to pre-approval vs pre-qualification.

  • Pre-approval may call for a mortgage application while pre-qualification won’t.
  • Having pre-approval could cost you money while pre-qualification won’t. (However, note that pre-approval is not certain to cost you). 
  • Pre-approval can give you information about your interest rate while pre-qualification won’t.
  • Unlike pre-qualification, pre-approval will require a credit check.

Pre-approval vs pre-qualification—which one should you choose?

Keep in mind that a pre-qualification may not have as much clout as a pre-approval. Still, as a potential buyer, you could find it useful for your own purposes. Pre-qualification could help you understand what you may be able to afford.

As someone in the market to buy a house, you may feel that the relevant question is simple. “When considering pre-approval vs pre-qualification, which one should I choose?” The information surrounding pre-approval and pre-qualification isn’t as clear cut as we might like. To answer that question, consider consulting with an expert (like a real estate agent) in your area. (As the Consumer Financial Protection Bureau noted in the quote above).

In other words, discover which one is right for you, for your area. That way, you may be able to head straight for the one that’ll be most useful to you in homebuying. Generally speaking, you may find pre-approval to be more useful if you need to inspire confidence in home sellers.

What might the lender want to know?

Getting a mortgage involves what we could call a relationship with your lender. They’ll be investing in you by supplying the money that you need. Obviously, this could be a risk for them. Because, of course, they could end up with someone who can’t pay them back.

Thus, it makes sense that lenders want to know about you—especially, about your financial history. Try to sympathize with their point of view. If you were about to enter into a business partnership with someone, you would want to know about that person, right?

For instance, you might want to know about how well they spend and save money. Do they burn through money as fast as they bring it in? Can they establish a financial goal, then set aside money to reach it? And can they disregard the temptation to spend it early?

You might also want to know whether your future business partner has a habit of fulfilling their obligations. Do they pay what they owe when they say they will? Do they show up for meetings and follow through on commitments?

Put yourself in the lender’s shoes

Similarly, a lender about to give a home buyer a mortgage will also want to know about their “partner.” Naturally, the lender could ask about the buyer’s financial situation. The lender may want to know about the buyer’s income and about assets the buyer has. Plus, they may also want to know about money the homebuyer owes to others. And they could want to know how well the homebuyer has done paying back money in the past.

Let them do their homework

Some of this information the lender may get from you. However, they could also verify information you’ve given them by going to others. For instance, the lender may reach out to your employer to verify your income. And they may check your credit, too.

Why get pre-approval or pre-qualification anyway?

Of course, you already assume that paper pushing will be a natural part of your home buying process. After all, when something as important as property changes hands, you would expect technicalities. A contract to actually purchase a house makes sense. And certainly, you’ll want to end up with a deed that says the home belongs to you.

But just what is the use of pre-approval or pre-qualification? Well, here’s where you want to be sure to look at things from the perspective of others. You’ve already tried to understand things from the lender’s perspective. So you know that it makes sense for a lender to need some financial backstory on you.

Next, it could also be helpful to think about it from the home seller’s perspective. They’re about to unload a large financial asset. It’s a piece of property worth plenty, and they want to end up with a financially good deal. Plus, they want this deal to actually go through to completion.

You found the place!

Let’s say you’ve scheduled a house showing. You walk into the home, and you love it. Immediately, you know this is where you want to settle and put down roots. Not only is it in your budget, it’s also beautiful and you can really imagine yourself feeling at home there.

You’re thrilled, and you want to offer to buy it immediately. You’re confident that you’ll be able to get the mortgage you need to make it work.

There’s just one catch. Regardless of how confident you are about your financial picture, the buyer’s confidence level matters too. It’s important for the buyer to know that you don’t just think you can work everything out—you actually can.

This is where pre-approval or pre-qualification could help you out. When the homebuyer is evaluating competing offers, they may gravitate toward the ones that seem more secure. The ones with a higher chance of going through instead of falling through.

Think of your pre-approval as a stamp of approval from the bank. As we said above, that doesn’t mean it’s airtight. But, it does give the home seller some confidence. It lets them know that you’re a serious candidate for their house and working with you could lead to a successful sale.

Work well with others to find your house

Buying a home is a big, exciting step. Understandably, you want to make sure you keep all the moving parts working together. And you want to complete all your own responsibilities at the right time.

Again, you may want to consult with a local professional to determine which of these—pre-approval vs pre-qualification—will best suit your needs. And remember, that while your end goal is to find a house for you, you’re not the only person with a stake in the process. There’s also the lender and the seller, and their needs are important, too.

Keep educating yourself

Pre-approval vs pre-qualification might not be the only thing you’re considering as you forge ahead. Looking to learn more about home buying and mortgages? Then check out 10+ First Time Home Buyer Tips: Save Your Sanity & Avoid Costly Mistakes. Or head to Common Types Of Mortgage Frauds And How To Avoid A Scam.