What is the difference between pre-qualification for a mortgage and pre-approval for a mortgage? Many times these two terms are confused with one another. They really are very different.
Pre-qualification for a mortgage is simply an estimate of how much mortgage you qualify for. Many times it can just be done over the phone. You simply supply the mortgage lender with basic information, such as income, assets, liabilities, down payment, etc. so that the amount of mortgage you qualify for can be determined. Sometimes, but not always the lender may check your credit during the pre-qualfication process. The information you provide is not verified during this process. Thus, the usefulness of mortgage pre-qualification is very limited.
Pre-approval for a mortgage is a firmer commitment by the lender and is a much more formal process. The pre-approval process includes a credit check and verification of employment, income, assets, liabilities, etc. During the pre-approval process the lender does all the work required for final full approval, except the appraisal and title search. The lender will require the following during the pre-approval process:
- Obtain a credit report to verify your monthly payments on loans and credit cards and to check your payment history.
- Obtain from you pay stubs and W-2 forms (or tax returns for the self-employed).
- Obtain statements from savings and investment accounts to verify your assets.
Pre-approval is certainly the better way to go for a buyer. Your chance of eventually getting final mortgage approval is increased significantly. These days with the way the mortgage industry is, it may even pay to get more than one pre-approval, so you have a backup in case one doesn't work out.
With regard to both pre-qualification and pre-approval, neither one guarantees a mortgage. Lenders still need to get property appraisals, title search and may even recheck you credit to make sure nothing has changed.
Buyers should certainly get a least one mortgage pre-approval before seriously looking for a house. It certainly improves your credibility when making an offer. Sometimes it can even be the deciding factor between two close offers. From a sellers point of view it certainly better to get an offer from someone who has been pre-approved, rather than someone who hasn't. As real estate agents we should make sure that buyers get pre-approved before seriously looking for a house.
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