Pre-Approval vs. Pre-Qualified: What’s the Difference?

How do people afford houses? They cost so much money!

The way most people pay for the cost of a house is with a home loan from a bank.

This is a large chunk of money that the bank loans to homebuyers to help them buy their house. Over time, the homebuyer pays the loan back with interest.

Real estate agents should expect their clients to withdraw a home loan to buy a property. Unless they’re sitting on a big mound of money.

So, at some point, you will encounter the word “pre-approved” or “pre-qualified.”

That’s why you should know the difference between pre-approval vs pre-qualified.

Both are helpful steps that show a buyer is likely to get financing, but neither is a guaranteed loan offer—and pre-approval usually carries more weight because the lender verifies more information.

What is a Pre-approval Letter?

Here’s what a pre-approval letter means: a letter that verifies the approval of a specific amount of money that the bank is willing to lend to the home buyer.

In real-world lending, a pre-approval is typically a tentative statement from a lender that they’re willing to lend up to a certain amount based on assumptions—so it’s stronger than a pre-qualification, but still not final approval.

Should the buyer meet the requirements of the lender, they will be issued a pre-approval letter. This contains the type of mortgage, interest rate, and terms and conditions.

Many pre-approval letters clearly state the loan amount (and sometimes the loan type), but an interest rate may not be included unless the buyer has locked a rate, and the final terms can change during underwriting.

This letter will also state the amount of mortgage the lender is willing to provide to the buyer.

Securing a pre-approval letter is essential. This is submitted along with the offer when buying a home. A pre-approval letter is important to have because it will ensure all parties that there are funds to finance the purchase. It gives the seller confidence that financing is likely, but it still isn’t a guaranteed loan offer.

The bank will need the following information to determine if they can approve the homebuyer for a loan:

• Renting history: Your buyer’s renting history is especially crucial if they do not have an extensive credit history.
• Credit history: This shows the lender the homebuyer’s history with building good credit.
• Bank statements and assets: These show the homebuyers liquidated amount of money.
• Tax returns: This shows proof of the earnings history of the homebuyer.
• Proof of income: This determines how much income the homebuyer has and their ability to make monthly mortgage payments.
• Valid ID: This shows proof that the homebuyer is who they say they are.

But, the pre-approval letter is not a guarantee, only the beginning of the lending process. The lender still reserves the right to either accept or reject your buyer’s request should they deem it.

Common reasons a pre-approval can change include underwriting conditions, an appraisal issue, job/income changes, new debt, or changes to the buyer’s credit.

Also, a pre-approval letter is not a commitment. Should the buyer choose to back out from the transaction, they can do so without facing any financial repercussions.

What is a Pre-qualified Letter?

So, what about a pre-qualified letter? What does that mean? A pre-qualified letter is a letter that informs the homebuyer that they qualify for a home loan.

Pre-qualification is usually a high-level estimate of what the buyer may qualify for based on information they provide—and depending on the lender, it may also involve a credit check (often a soft inquiry).

In other words, the letter proves that the homebuyer has the chance to become pre-approved.

Pre-qualification is often fast (sometimes minutes or same day), because it’s a high-level assessment. Timelines vary by lender.

Unlike the pre-approval letter, this does not take into account the analysis of the buyer’s credit history, tax history, and other financial documents.

Pre-qualification usually involves less documentation than pre-approval. Some lenders may still check credit (often a soft pull), while others rely mainly on buyer-provided information.

How to Get a Pre-Qualified Letter

In order for a buyer to be pre-qualified, all it takes is for them to contact the lender. They will then provide them with an overview of their financial history. The lender may ask about their financial status such as their assets and liabilities, as well as their income.

Once the lender has reviewed the information, they will give an estimated loan amount to the buyer.

The pre-qualification process usually only takes a couple of days as it is a high-level assessment.  In many cases, it can be much faster (even same day), because it’s designed to be a quick snapshot rather than a full documentation review.

Unlike the pre-approval letter, this does not take into account the analysis of the buyer’s credit history, tax history, and other financial documents. The better way to say it is that pre-qualification usually requires less documentation than pre-approval; some lenders still look at credit and other basics, but pre-approval typically involves deeper verification.

Find the Right Lender

Before you are able to help your client with their mortgage application process, you must first connect them with the right lender.

When you’re growing your network, connect yourself with lenders. This way, you can find a reliable lender that you can confidently refer to your clients.

Working with a Lender

Once your buyer is connected with a lender, the lender will connect with your buyer. It is the lender’s job to understand the buyer’s financial situation and verify if the buyer can afford a mortgage. Through this process, the lender will determine if the buyer will be pre-approved or pre-qualified.

Pre-approval typically carries more weight because it’s more verified, but both pre-approval and pre-qualification are not guaranteed loan offers.

Final Thoughts on Pre-Approval vs. Pre-Qualified

Both pre-approval and pre-qualified mortgage letters are in the mortgage application process. But, a pre-approval letter is still not guaranteed, it signifies that a lender has verified their financial status. This will provide the buyer with more leverage when trying to secure a deal. The simplest takeaway is: pre-qualification = quick estimate, pre-approval = stronger verification, and neither is guaranteed financing until the loan closes.