What's The Difference Between a Mortgage Pre-Qualification vs. Pre-Approval?

For most people, buying a house is the most significant financial decision they’ll make in their lives. No one wants to go through the process of finding the perfect home, negotiating a sale price, and then having financing fall through. That’s why mortgage pre-qualification and pre-approval are important steps.

Mortgage pre-qualification and mortgage pre-approval are both tools that can give you an idea of how much house you can afford, but they aren’t the same. Here’s a closer look at mortgage pre-qualification vs. pre-approval and how each one can help you on your homebuying journey.

Mortgage pre-qualification vs. pre-approval

Although some people may use “mortgage pre-qualification” and “mortgage pre-approval” interchangeably, they are two distinct processes:

• Mortgage pre-qualification gives you an estimate of how much you can afford to spend based on self-reported data
• Mortgage pre-approval involves getting a statement from a lender that they are willing to lend you a certain amount

Mortgage pre-approval is a more formal process, and you usually have to submit financial data to the lender before you receive a pre-approval. In most cases, someone selling a home will require a mortgage pre-approval letter before they accept your offer.

What is mortgage pre-qualification?

Before you start shopping for a house, it’s a good idea to know the limits of your budget. That’s where pre-qualification comes in. This fast, free process can give you an idea of what you can afford before you begin your search.

How it works

Most lenders offer free pre-qualification tools on their websites. These tools will usually ask for basic financial information, and they may do a soft credit check that has no impact on your credit score.

Pre-qualification tools will often deliver results instantly or within a few minutes. They will tell you how much you’d likely be approved for if you took out a mortgage today. However, they usually don’t tell you what your interest rate would be.

What information lenders use

To make sure your results are as accurate as possible, you should gather the following:

• Your income details (W-2 forms or tax returns)
• Statements for bank accounts and investment accounts
• Your total debt (and total debt payments each month)

Most pre-qualification tools use self-reported data, so you don’t have to worry about actually sending documents at this stage. 

How accurate is it?

Mortgage pre-qualification tools are fairly accurate, but they aren’t as precise as a pre-approval. Much of their accuracy depends on the data you put in.

For that reason, pre-qualification is a valuable tool for you as you shop for a home, but it carries little to no weight with sellers. If you want to show a seller you can afford their home, you’ll need a mortgage pre-approval.

What is mortgage pre-approval?

Getting a mortgage pre-approval takes more time and effort, and it also includes a hard credit check. But if you’re serious about buying a home, it’s worth it.

How it works

You’ll need many of the same documents as you would for a pre-qualification. However, for a mortgage pre-approval, you’ll need to submit those documents to the lender, who will then conduct a detailed review of your finances.

It can take up to 10 days to get a response. If you’re pre-approved, your lender will usually tell you how much you’re pre-approved for and what your interest rate will be.

Notably, pre-approval letters have an expiration date. Most lenders clarify that they are only good for 60-90 days.

Documents required

Although requirements can differ slightly between lenders, you’ll generally need the following for pre-approval:

• Your Social Security number
• W-2 forms for the past two years and pay stubs for the last 30 days (if employed)
• Tax returns for the last two years and 1099s/profit and loss statements (if self-employed)
• Bank statements for the past 60 days
• Statements from retirement and investment accounts
• A list of monthly debt payments

Many lenders also ask for contact information for past landlords and/or employers.

Why mortgage pre-approval is stronger than pre-qualification

A mortgage pre-approval is stronger than a pre-qualification for a few different reasons:

• It involves the lender reviewing your financial information
• It involves a hard credit check
• It provides more detailed information on the mortgage you’d likely be approved for
• It shows sellers that a lender is willing to give you a mortgage

However, a pre-approval is not a 100% guarantee. Before the lender gives you a formal loan offer, they’ll have to complete the underwriting process, which includes an appraisal of the property.

How to improve your chances of getting approved

Before you get a pre-qualification or pre-approval, these steps may help you maximize your chances of success:

Lower your debt-to-income ratio (DTI)

Your DTI is the amount of your monthly debt payments divided by your total monthly income. Most lenders want your DTI to be under 45%, but you’re more likely to qualify for optimal rates if it’s below 36%.

Avoid new debt before applying

Taking on new debt can increase your DTI and decrease your credit score. Neither is good when you’re trying to buy a home.

Improve your credit score

Paying off debt, continuing to make on-time payments, and limiting new credit can all help boost your score. So can signing up for credit-builder apps like Kikoff!

Getting Ready to Buy a Home?

If you’re hoping to buy a home in the near future, thinking about mortgage pre-qualification vs. pre-approval can be daunting. However, if you know you have good credit from the start, it may make your journey a little less stressful.

That’s why we’re here. Kikoff is a credit-builder app that makes building credit simple. We offer credit lines, debt negotiation, rent reporting, and other tools that can help you improve your credit or establish a credit history for the first time. 

It’s free to join, and we don’t check your credit when you sign up. Get started with us today!