Pre-qualification vs. Pre-approval

Although the terms sound similar, there is a big difference between loan pre-qualification and loan pre-approval. With pre-qualification, a lender reviews information about your income, debt and assets to come up with a ballpark loan estimate. A pre-qualification is easily done via phone or online.

With a pre-approval, a lender reviews your credit history in detail to determine a specific mortgage amount for which you’re approved. A pre-approval is verification that a lender is willing to loan you a certain amount of money for a home purchase. This reassures the seller that you’re serious about the purchase and able to afford the home. Going through the pre-approval process also alerts you early to any concerns with your credit and helps to speed up the loan process after you’ve made an offer. Generally, lenders base your loan pre-approval amount on your debt-to-income ratio (the amount of your monthly debt compared to your monthly income) and your credit score. If you have an existing relationship with a credit union or bank and are pursuing a pre-approval through that same institution, the lender may also take into account your history with them.

Key differences between pre-qualification and pre-approval include the following:

Considerations Pre-qualification Pre-approval
Requires mortgage application No Yes
Requires application fee No Maybe
Requires credit history check No Yes
Based on review of your finances No Yes
Requires estimate of down payment amount No Yes
Lender provides an estimate of loan amount Yes No
Lender provides a specific loan amount No Yes
Lender provides interest rate information No Yes

Choosing a Lender

When you need to take out a home loan, it pays to shop around and find the lender that best suits your needs. These steps can help you find that perfect fit:

Ask family, friends and co-workers for recommendations.

Meet with a loan advisor at your credit union or bank where you currently have checking and savings accounts.

Check out a lender’s reputation. Look at online customer reviews and check with your local Better Business Bureau or Chamber of Commerce to see if there are complaints against the lender. 

Ask for a pre-qualification to see how much you can afford and for an estimate of costs to close. Your lender should be able to provide a detailed list of estimated closing costs, including taxes, titling and interest rates.

Questions to Ask

When consulting with potential lenders, ask them these questions to help determine if they’re right for you:

What loan programs do you offer? If you qualify for special programs that can make buying a home easier or more affordable, such as VA mortgages for servicemembers, you’ll want to choose a lender that offers those programs.

What is the interest rate on this loan? The interest rate you pay on your mortgage plays a large role in how much home you can afford, so it pays to shop around for a great one. 

Can I pay discount points? Discount points are a form of prepaid interest that can reduce your mortgage rate. One point equals 1 percent of the loan amount. For example, on an $180,000 mortgage, 1 point equals $1,800.

Can I lock in the interest rate? Interest rates can go up or down between the time that you apply for a loan and the time that you close on a home. You can lock in a rate for a period of time. Find out if the lender charges a fee for locking in rates. 

Can you provide an estimate of closing costs for my loan? Mortgages come with lots of additional fees. Request a pre-qualification to gauge what you can afford. Lenders should be able to give you a detailed estimate of closing costs, including taxes, titling and interest rates.

Will I be penalized for paying off the loan early? You may be able to get a lower interest rate on your loan if you agree to a prepayment penalty. However, if you pay off the loan within a certain amount of time, you’ll have to pay a fee that is typically a percentage of the loan and varies by lender. 

How much of a down payment do I need to pay? This amount varies depending on the loan type. It’s typically between 3-20% of a home’s purchase price, although some lenders offer no-down-payment loans.

What do I need to qualify for a loan? Find out what sort of income and credit score the lender expects. Loan qualifications for VA and FHA loans typically are less stringent than conventional loans, but often require additional documentation.

How long will it take to process my loan application? While it varies by lender and mortgage type, the typical timeframe from application to closing is 60 days.

Who will service my loan? Some lenders keep and service a mortgage for the life of the loan. Others sell the mortgage to a third party. 

Required Documents

To start the pre-approval process, you typically need to supply the lender with these documents:

Proof of income, including W-2 statements and federal income tax returns from the past two years and pay stubs from the past 30 days that show current and year-to-date income

Proof of assets, including bank statements and investment account statements from the past 60 days

Monthly debts and living expenses

Employer contact information 

Current landlord’s contact information, if applicable

Social Security Number 

Estimated purchase price of the home you wish to buy

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