Mortgage Preapproval vs. Prequalification: What Is the Difference?
If you are searching for a home loan, there are two terms that you must have come across while doing your research: pre-approval and pre-qualification. You must have wondered what these terms mean and whether there is any difference between them.
In your quest to understand how to buy a house, learning the difference between these two terms is important. In fact, it is the first step towards securing a home loan. In the article below, we will look at the difference between both the terms and whether you should choose pre-approval or pre-qualification.
What Is Pre-Qualification for a Home Loan?
Pre-qualification is one of the earliest steps to getting a home loan. Here, the borrower submits their financial information to the lender to review and determine whether their earnings and current financial position qualify them for the loan. The financial information includes salary details, bank account information, loan requirements, and other specific information requested by the lender. Since this phase is just the initial step, you don’t have to submit your tax statements.
Your lender will go through all the information provided to determine whether you will be able to repay the loan amount. This process is known as a “soft inquiry” and doesn’t guarantee that your loan request will be approved. It only helps you understand how much loan you can borrow and the mortgage options that are available to you. It is quick, simple, and doesn’t impact your credit score.
Before moving forward with pre-qualification, it is important that you have a clear idea of your credit score as well. This will help you avoid unrealistic expectations and enable you to understand the chances of a loan approval.
What Is Pre-Approval for a Home Loan?
Pre-approval for a home loan is a lengthier and more formal process. There is a thorough investigation of the borrowers’ credit history and their financial information is closely reviewed.
A pre-approval means that you are much more committed as a home buyer and the process will help you understand how much you can afford to borrow. Similar to pre-qualification, pre-approval don’t really guarantee a home loan but they do provide a more precise estimate of the mortgage.
The lender may ask for your W-2 statements, tax returns from the previous year, and other detailed information. The process is known as a hard inquiry and may decrease your credit score temporarily.
An important thing to note is that in some cases, pre-qualification and pre-approval are used interchangeably. Although related, the terms differ and are beneficial depending on your home-buying stage.
The Difference Between Pre-Approval and Pre-Qualification
Here is how pre-approval and pre-qualification differ from each other:
| Features | Pre-Qualification | Pre-Approval |
| Credit Check | It is a soft inquiry check that doesn’t affect your credit score | It is a hard inquiry that may temporarily impact your credit score |
| Document Required | Basic documents and information such as income statements and bank information are required. | Verified financial documents along with tax statements are required. |
| Time Required | Can be done in minutes | Requires a few days |
| Cost | Free of cost | May have fees |
| Ideal For | Early inquiry gives you a general idea on what you can afford | It provides you with a more detailed understanding of the mortgage approval process. |
Buyers can benefit from both pre-qualification and pre-approval of a home loan. Pre-qualification helps you during the early stage of the home-buying process, as it gives you a vague idea of what you can afford. A pre-approval is more like a rough estimate that helps you when you are committed to buying a house.
It is a wise choice to start with a pre-qualification to understand your borrowing capacity and once you are ready for an in-depth financial analysis, you can move with a pre-approval.
Conclusion
The journey from dreaming of buying a house to owning a home is long, full of confusion, and overwhelming. Once you have a good handle on your current financial situation and what you can afford, it becomes easier to set realistic expectations. Getting a pre-approval or a pre-qualification will depend on where you are in the home-buying process. Either way, taking that first step brings you closer to finding the right home loan for your needs.
