Home Loan Insight: Getting Pre-Qualified vs. Pre-Approved for a Home Loan - Which is Better?

Home Loan Insight: Getting Pre-Qualified vs. Pre-Approved for a Home Loan - Which is Better?

That’s a question I occasionally get from home buyers just starting their search for a new home.

So which is better, getting pre-qualified or pre-approved? To answer that, here’s a little insight into the differences between the two.

Getting pre-qualified is the initial step in the home loan process, and it's generally fairly simple. It can be done over the phone or on the Internet, and there is usually no cost involved. More importantly, it does not include an analysis of your credit report. In essence, the lender who pre-qualifies you assumes the financial information you share is accurate, and does not verify your information.

In contrast, getting pre-approved tends to be much more involved. You fill out a home loan application (there is usually an application fee) and provide the lender with documentation that allows them to perform a thorough investigation of your financial background and current credit rating.  To get pre-approved, the lender needs to verify all of your information.

The advantage of being pre-approved is that the lender provides you with a conditional commitment in writing for an exact loan amount, which lets you know the highest price you can afford to pay for a home. Plus, it gives you an advantage in the eyes of potential sellers, because they know you're one step closer to obtaining an actual home loan.

So which is better? When you're just starting the home buying process—searching the Internet for homes or condos, as well as the neighborhoods you may want to live in—but aren't ready to buy just yet, then getting pre-qualified is better because it gives you an idea of how much home you can afford.

When you're ready to buy—you’ve zeroed in on the neighborhood you want to live in and are ready to start making offers—then getting pre-approved is better. By getting pre-approved, you will know exactly how much money a lender will loan you. Plus, when you find the home of your dreams and make an offer, the home sellers will know that you can afford the home and that your offer is serious.