The Difference Between Pre-approval And Pre-qualification In Mortgages

Nearly all homebuyers need to obtain a mortgage from a lending company in order to purchase property. While interest rates are at an all-time low, banks and mortgage companies and tightening their restrictions on who can borrow. Before setting sights on your dream house, learn about the difference between pre-approval and pre-qualification when it comes to mortgages to save time later trying to get a loan.

What Is A Mortgage Pre-Qualification?

A mortgage pre-qualification is when the buyer contacts a mortgage lender, on the phone or in person, and the representative asks a series of questions. This information, including the current address, Social Security number, annual income and credit report, provides the lender with a general idea of the kind of mortgage the buyer can afford. The lender sends the estimate to the buyer through fax or email with a letter claiming the amount of money he is qualified to borrow, with a disclaimer essentially stating that the lender will give the buyer a loan after confirming the information given. While quick and easy, this letter is more of an approximation in the buyer’s purchasing power.

What Is A Mortgage Pre-Approval?

The mortgage pre-approval process is a more thorough way to determine the amount of a loan. In order to qualify, the buyer needs to present the lender with a credit report, two years of work history, income tax forms, bank statements and copies of credit card statements. A mortgage underwriter reviews the information for approval before the lender sends out a letter with a mortgage amount. This takes longer than a pre-qualification, but it is a more reliable way of figuring out how much you can really afford to borrow.

What Is The Main Difference In Mortgages?

When it comes down to it, the real difference between these types of loans is in how they are documented and verified. A pre-approval loan has the buyer give copies of his income and bank account statement to the lender. Otherwise, the buyer can just tell the lender how much he makes and take his word for it for an estimate. Basically, income verification with written documents is the defining requirement that differentiates the mortgage processes.

Keep in mind that a pre-approval letter does not guarantee a mortgage, nor does it commit the lender to giving you a loan. Instead, the letter simply states that you can afford to buy a house with this mortgage price and that the bank is willing to lend you so much money to do so. Either way, getting an approval letter is the first step to take if you are serious about buying a new home.