Mortgage Preapproval vs Prequalification: What’s The Difference

Most homebuyers don’t have enough money saved to pay for a house in full, so when they want to purchase a home, they need to take out a mortgage from a lending institution. Before a bank agrees to the loan, they need to know that their interests are protected, meaning their money.

To find out if the borrower is a worthy risk, banks run checks to see if the homebuyer pre-qualifies and pre-approves first to find out if the person or group is worth lending the money to. So, what’s the difference between pre-qualified and pre-approved?

What Does Pre-Qualified Mean

A pre-qualification is the first step in getting a loan. It’s a basic assessment by the lending institution to see if and how much of a mortgage loan you could qualify for. During the assessment, the financial advisor evaluates your financial income and then gives you an estimate of how much money they could lend you to buy a house. A pre-qualification is not a guarantee that you will get the loan.

There is no cost to have a pre-qualification done, and it can be completed over the phone or in person. Pre-qualifying for a mortgage is a fairly quick process. Once you have met with the financial agent and the assessment is complete, you should receive a pre-qualification letter within a few days.

Pre-qualifications don’t carry the same weight or leverage as a pre-approval, but it is helpful when you want to start looking for a home. By knowing how much you could be eligible to receive in a mortgage loan, you will know what price range of homes you can afford when you start actively house shopping.

Pre-qualifications are good for 60 to 90 days, so it’s ideal to get one when you want to start planning to house hunt.

What Does Pre-Approval Mean

A pre-approval is the second step in securing a mortgage. It’s a more in-depth evaluation of your financial and economic situation. When assessing how much to lend you, banks look at your total financial picture including your assets and debts, employment status, income, and overall credit rating.

So, what does pre-approved mean for a loan? A pre-approval is more of a commitment from the financial institution. While it’s not a guarantee that the bank will loan you that money, it is a commitment meaning they are prepared to loan you a specific amount of money to buy a home.

It also means the lending institution has determined, through their investigation, that you are a good candidate to loan money to for a home purchase. As a homebuyer, it gives you more clout when house hunting because other agents and institutions know you have been assessed as a qualifying candidate for a mortgage.

To be pre-approved, you must complete a mortgage application and supply the lender with all the needed information and documentation so they can perform a thorough and comprehensive financial background check. Pre-approval rates usually include the amount of interest you will be paying on the loan and break down the repayment amounts.
Like pre-qualifications, pre-approvals are also only good for 60 to 90 days.

The main difference between a pre-approved vs pre-qualified is that a pre-qualified assessment is for your benefit. It’s a good first step to let you know how much of a loan you could qualify for.

A pre-approval assessment is for the lender’s benefit. It’s a commitment by the lender confirming that they are prepared to loan you a specific dollar amount to purchase your home.