If you’re in the market for a home and will need financing, chances are you’ve heard the terms pre-qualification and pre-approval. A lot of times these terms— which are actually very different— are unfortunately used interchangeably. So, what’s the big difference, and between pre-approval vs. pre-qualification, what will work for you? Learn what these two terms mean and understand their differences so you’ll know what makes the most sense for you.
What is a pre-qualification?
For many people, getting pre-qualified is the often the first step in the home search process. In a nutshell, a pre-qualification is an estimation of what you can borrow. Typically a pre-qualification can be done on the phone or in person and takes very little time.
Unlike a pre-approval, a pre-qualification is only an approximation on what you can afford. You’ll never hand over bank statements, W2s, tax returns, etc. during the pre-qualification process. Your lender will simply use the information you provide to come up with an estimate as to how much you can qualify to borrow.
What is a pre-approval?
A pre-approval scrutinizes every aspect of your credit worthiness; everything from your income, debt, assets and credit report will be scrutinized. A pre-approval determines exactly how much you may borrow under a specific mortgage program.
Basically, a pre-approval is completing a full loan application, providing complete documentation and having the application reviewed by an underwriter, prior to contracting for a home purchase.
Once you’ve found the home you wish to purchase, your pre-approval will become a full mortgage loan commitment, subject to a fully executed purchase contract and the completion of an appraisal.
A pre-approval also fast tracks your closing process since your lender now has the bulk of the necessary paperwork required to execute the loan.
What documents do you need to complete the pre-approval process?
When the pre-approval process is complete, you’ll receive a statement from your lender detailing out exactly what you are qualified to borrow. Because this process is so in-depth, your lender will need some documents from you to complete the process.
Be ready to provide your lender with the following:
- Income info: If you’re a W2 employee go ahead and gather your last two pay stubs.
- W2s: You’ll also need to dig up your last two years of tax returns and W2s.
- Asset verification: Buying a home is a big financial decision and lenders want to make sure you’ve got the assets to cover your down payment and monthly mortgage payments. You’ll need to provide at least two months worth of statements for any account used in sourcing your down payment. Paying part of the down payment with a gift? You’ll need to source that, too.
- Driver’s license and social security card: You’ll need these so that your lender can verify who you are and run a credit check.
What’s best for you?
If you’re just dipping your toes into the home buying process, perhaps a pre-qualification is right for you. You can receive a guesstimate for what you might be able to borrow from your lender and use that as a baseline as you casually look through properties on your timeline.
Conversely, if you’re serious about purchasing a home in the near future, a pre-approval is absolutely the best way to go. As the amount of affordable homes for first-time buyers continues to be scarce, you may find yourself in a multiple offer situation, and having a pre-approval tells sellers you’re a serious buyer.
Bottom line: While pre-qualification and pre-approval are terms that are quite often transposed, it’s important to remember that they are very different. Even if you aren’t in the immediate market to buy a home, going ahead and moving through the pre-approval process can help you identify any potential problem areas and give you time to correct them as you prepare to buy in the future.