Is there a difference between getting a pre-qualification letter and a pre-approval letter from your lender when starting the home buying process? And if so, what is it, and is one better than the other?
So the answer is “yes”, there is a difference.
The pre-qualifying process is a preemptive information gathering exercise where your lender will ask you to provide the information necessary to get pre-approved for a loan. However, other than pulling your credit from the social security number you’ll provide them with, they won’t actually verify the rest of the information they may ask you for. This includes W-2s, a current pay stub, a summary of your assets and your total monthly expenses, and if you already own real estate, a copy of both your mortgage statement and your homeowners insurance policy.
Based on the information you provide your lender can run some basic calculations and give you an idea of how much of a loan you’ll likely qualify for. However, since they haven’t verified the majority of the information you’ve given them, your pre-qualification won’t be as valuable as a pre-approval.
So the biggest difference between pre-approval and pre-qualification, at least from a lender’s point of view, is validating the information with documents as opposed to just getting verbal information. In a pre-approval the lender isn’t just going to take your word for it, they are going to verify the information you have given them.
From a borrower’s point of view, the difference is the leverage that pre-approval gives you when it comes to purchasing a home since most seller’s agents won’t accept an offer without a pre-approval letter. They want it to say ‘pre-approval’ at the top because they know the lender has done an in-depth analysis on the buyer.
The pre-qualification letter has its place though in the very beginning of your home searching process. It will help you and your buyer’s agent determine what is a good starting price bracket for your property search. But that will only get you so far in the process and you will soon need to take it to the next level and get a pre-approval letter.
Think of it this way. Getting pre-qualified for a loan is like asking for approval from your significant other’s parents before you propose. While it might be nice to get a “yes” from the parents, until you drop to one knee for the ultimate approval, you aren’t really getting anywhere.
Of course, you’ll still have to go through the underwriting process after you submit the application and wait for final approval.
If you need any help getting a pre-qualification or pre-approval letter, let us know. We have some great lenders we work with that can guide you through the process and put you in the right position to take advantage of this incredible market we find ourselves in.