Understanding Pre-qualified vs. Pre-approved Mortgages

Before you begin searching for the home of your dreams, you’ll have to start gathering documents you will need to apply for a mortgage. In doing so, you’ll often see terms used, such as pre-qualified and pre-approved, in reference to different mortgage options. While the financing portion of purchasing a home can be a lot of information to take in, it is important to take the time to understand the details.

In this article, we’ll take a closer look at some of the basics surrounding pre-qualified and pre-approved mortgage loans to help you determine which is the best option for you.

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What is a Pre-qualified Mortgage?

A pre-qualified mortgage loan is one of the earliest steps you can take toward your upcoming Homeowner journey. Essentially, a prequalification estimates what you can borrow to buy a home.

To obtain a prequalification, you will be required to provide information about your finances and undergo a current credit check.

A pre-qualified mortgage is very helpful to have during the searching process. Before you begin searching for homes, you can work with your lender to compare different mortgage options to pinpoint the right product for your financial needs.

What is a Pre-approved Mortgage?

A pre-approved mortgage loan is different from a pre-qualification because it is a complete mortgage application with lender verification. In short, having a pre-approval from a lender is the closest you can get to confirming your mortgage capabilities without having an actual contract.

The pre-approval process begins with completing a mortgage application and verifying any financial information your lender requests. Similar to a pre-qualification, your lender will also perform a current credit check.

Once approved, you will receive a pre-approval letter from your lender. This letter is not a commitment but an offer stating they will lend you the specified amount. A pre-approval letter is typically valid for 90 days.

So, what is a pre-approved mortgage best for? You should seek out preapproval when you are ready to put an offer on a home. Having a mortgage preapproval can send the message to sellers that you are serious about becoming a Homeowner and have the necessary funds.

Which Type Is Best?

Determining whether you should look for a prequalification or preapproval for your mortgage depends on what stage you are in in the home buying process. As a general rule of thumb, you should look for pre-qualified mortgage loans when you are searching for a home and pre-approved mortgage loans when you are ready to begin putting in offers.

To look into more details about pre-qualified vs. pre-approved mortgage loans, take a look at the pros and cons of each.

Pre-Qualified Mortgage Loans Pros and Cons

Pros

  • Quick process (can be done in five minutes over the phone)
  • Do not need to provide documentation
  • Considerably accurate

Cons

  • Not a solid form of financial security
  • It can be difficult if you are self-employed, have a second job, collect overtime income or bonuses
  • Credit checks aren’t always conducted
  • Not as reliable as pre-approvals

Pre-approved Mortgage Loans Pros and Cons

If you are further along in the home buying process and have a good idea of what you are looking for, a preapproval will come in handy. Although the process to obtain a preapproval letter can be tedious, it will ultimately help you in the long run.

Pros

  • Gives buyers more confidence
  • Full mortgage approval without the contract
  • Makes becoming fully approved a much quicker process

Cons

  • Takes longer than prequalification
  • Requires documentation

What Information Are You Required to Provide for Each?

Now that you have a better idea of the differences between a pre-qualification vs. pre-approved mortgage loan, let’s dive into what information is required for each.

Required Information for Prequalification

A prequalification will be a more straightforward process that requires less information from the buyer. You can anticipate submitting the following information for a pre-qualified mortgage loan:

  • Income information
  • Basic bank account information
  • Current credit check
  • Down payment amount
  • Desired mortgage amount

Required Information for Pre-approval

One of the stark differences between prequalification and preapproval is the amount of required information. A preapproval will require more detailed documentation of your current financial status, including:

  • Pay stubs showing past 30 days of income
  • Two most recent bank statements or bank account numbers
  • Current credit check
  • Down payment amount
  • Desired mortgage amount
  • W-2 statements
  • Last two years of tax return forms

For anyone thinking of becoming a Homeowner, both pre-qualification and pre-approved mortgage loans can be beneficial tools for the process. If you’re early in your search process, you may choose to opt for a pre-qualified mortgage to get a better idea of your budget. Otherwise, if you’re ready to start putting in offers, a pre-approved mortgage loan is going to be your best bet.