Pre-Qualified Vs. Pre-Approved (Copy/Informational Blogpost)

At first glance, the terms pre-qualified and pre-approved look very similar. Both words even begin the same way! But each indicate different steps in the homebuying process.

The two terms are both used to help figure out what house is best for you, but a lender will need different things for each one. We’ll look at the two individually so you can see how they work. We’ll start with a pre-qualified letter.

Pre-Qualified Vs. Pre-Approved

Pre-Qualified

A pre-qualified letter is often the first step when searching for a home. It especially helps first-time homebuyers who want to test the waters of buying a new home, giving them an idea of what size loan they might qualify for.

Pre-qualification is based solely on data that you provide to a lender. After you describe your finances (giving information such as income, debt, and credit), the lender then gives you an estimated amount of how much you may be able to borrow. So, this letter’s good for a general sense of what various mortgage options are available.

Even better, it can be done in person, online, or over the phone. Unfortunately, there’s still no option for carrier pigeon.

Pre-Approved

A pre-approved letter is more than just an idea of financial stability. It’s proof of it.

To be pre-approved, your lender will conduct an extensive background check of your finances. Then the lender will give you a conditional commitment for an exact loan amount, usually valid for 60 to 90 days.

Why a time limit? Well, that’s because finances can change. And since pre-approval offers an amount based on your specific finances, that means it would change too. For example you might add a few zeros to your bank account if you win the lottery tomorrow!

A pre-approved letter shows sellers that you’re a serious buyer, because obtaining it requires thorough documentation.

We’ll take a look at what this letter proves (and how) in the next example.

Scenario: Tarzan Buys a Home

Tarzan and Jane decide to buy a home after his banana business takes off (she wasn’t a fan of his bachelor tree-pad). After getting an idea of available loans through pre-qualification, their next step is pre-approval.

Tarzan shops multiple lenders. Using thorough documentation provided by Tarzan, the lenders then check: his debt-to-income ratio, employment history, credit history, credit score, assets, liabilities, plus anything else related to his finances.

Success! Tarzan and Jane are pre-approved for a specific loan amount.

Now the happy couple can show sellers this letter while searching for the perfect house within their price range (hopefully one with lots of trees).