If you’re looking to buy a home, you’ve likely been told that you need to be pre-qualified or pre-approved in order to get a mortgage. While these terms are often used interchangeably, there are many distinct differences between the two that every homebuyer should understand.
A pre-qualification is a good first step to understanding how much home you can afford, while a pre-approval takes it one step further by verifying your financial information and credit history. In addition to a standard pre-approval, there is also something called an underwritten pre-approval. This type of pre-approval can often be a buyer’s secret weapon in highly competitive markets.
As a prospective homebuyer, it’s important to understand what each of these terms means, the differences between them, and which option is right for you. So before you start touring homes and attending open houses, here’s what you need to know about being pre-approved vs. pre-qualified.
What is mortgage pre-qualification?
Getting pre-qualified for a mortgage is one of the first steps you can take in the home buying process. A pre-qualification is an informal evaluation of your financial situation, usually performed by a lender. As a buyer, the pre-qualification will tell you how much you may be able to borrow for a mortgage. It helps you understand where your finances stand and if you need to work to bolster your financial position before you move on to pre-approval. However, being pre-qualified holds no weight with sellers and will not help strengthen an offer you make on a home.
What documents do you need for a pre-qualification?
For a typical pre-qualification, your lender will ask you to state how much debt you have, your income, and what assets you own. You will not have to provide any official documents, such as W-2s, bank statements, and tax returns. Additionally, the lender won't perform a hard credit inquiry (so your credit score won't be affected).
How does pre-qualification impact the strength of your offer?
A pre-qualification will ensure you start your home search at the correct price range of homes you can afford, however, it doesn’t serve much use beyond providing that. A seller will not view your pre-qualification as an advantage when you make an offer. Their main concern is whether you can close on the purchase; the pre-qualification simply tells them that you can afford their price.
A final note on pre-qualification
Being prequalified for a mortgage is a good starting point if you are on the fence about deciding whether you want to rent or buy a home. But if you are serious about buying a home, you’ll want to make sure you’re pre-approved for a mortgage.
What is mortgage pre-approval?
Home loan pre-approval is the step in the home buying process where the possibility of homeownership becomes real. If you’re confident about your finances and you’ve kept your credit score between 640-850, you could skip the pre-qualification stage and pursue pre-approval as your first step to buying a home.
A mortgage pre-approval is a statement from a lender that says you are qualified to borrow up to a certain amount. Your pre-approval will also determine what types of loans you could be approved for and what your interest rate might be.
What documents do you need for pre-approval?
During the mortgage pre-approval process, a lender asks you to document your income by providing your W-2; if you’re self-employed, you’ll need to provide tax returns for the last two years.
You will also need to provide bank statements to verify the funds you have in checking, savings, and any other accounts. The lender will also ask for documents to verify cash value for any life insurance policies and statements for any investment accounts.
The lender will run your credit report, which will result in a “hard inquiry,” meaning it can cause your credit score to decrease by a few points - however, this is temporary. The lender will review your report to verify your credit score, debts, income, and assets. You’ll also need to provide your passport or driver’s license to verify your identity.
How does your pre-approval impact the strength of an offer?
With a pre-approval letter, sellers gain confidence that you’ll be able to close on the purchase if you write an offer. Think about it: if two buyers are making an offer on a home and only one is pre-approved, who do you think the seller is going to be more likely to go with? In almost all cases it’s going to be the buyer that has a pre-approval letter since there’s a lot less risk to the seller of the deal falling through due to lack of financing.
What credit score do you need for pre-approval?
To qualify for most mortgage programs, you’ll need a credit score of at least 620: the higher your credit score, the better the rates you’ll be offered. A credit score of more than 740 will allow most homebuyers to qualify for the best mortgage rates. With a credit score between 620 and 740, you’ll typically qualify for pre-approval.
When is the best time to get pre-approved?
Ideally, you’d have your mortgage pre-approval letter before you start looking at homes. Having mortgage pre-approval in hand shows a seller you’re a serious buyer and could compel them to give your offer a closer look.
How long does a mortgage pre-approval last?
Your mortgage pre-approval will typically remain valid for about 60 days. The pre-approval letter will indicate an expiration date, after which it is no longer valid. Pre-approval letters “expire” because a borrower’s employment, assets, and debts can change. Lenders need up-to-date information before agreeing to another pre-approval. If your pre-approval letter expires, see your lender to get a new one.
A final word on pre-approvals
Even though you have been pre-approved, the lender could still deny you a mortgage. Denial doesn’t happen often but can come into play if you’ve taken out other lines of credit, lost your job, or suffered an income reduction in the period after your pre-approval came through. Other uncontrollable factors could throw a wrench into final mortgage approval, such as a home appraisal with a value less than the home’s purchase price. To stay on track, focus on the things you can control: your finances and your credit. Do what you can to improve your credit score and keep your income steady.
What is an underwritten pre-approval?
For an underwritten pre-approval, you go through the full underwriting process. This is typically done once you have found a home and want to make an offer. However, if you work with a lender that does underwritten pre-approvals, you can complete underwriting ahead of time as an extra step to bolster your pre-approval. This process requires more time and effort upfront, but it ensures a faster and smoother loan finalization process when you find the home of your dreams.
With an underwritten pre-approval in hand, you will look entirely prepared to complete the transaction to purchase a home, which provides sellers the confidence to accept an offer. Sellers like underwritten pre-approvals even better than standard pre-approvals.
What documents do you need for an underwritten pre-approval?
You need the same documents for underwritten pre-approval as you do for standard pre-approval, outlined above. Lenders will still review bank statements, credit reports, W-2s, and tax returns, along with any asset and investment accounts, and verify your identity.
The lender will also take an additional step to verify your employment with your employer directly. Once the underwriter is satisfied with the complete credit package, they will issue a fully underwritten pre-approval letter to support any offers you make
A final word on underwritten pre-approvals
The same risks apply in the underwritten pre-approval process as the pre-approval process. Lenders may still deny you a mortgage if you’ve taken out other lines of credit, lost your job, or experienced a loss of income. Additionally, the home appraisal still needs to be equal to or higher than the home’s value.
So which should you get? A pre-qualification, a pre-approval, or an underwritten pre-approval?
It depends on how serious you are about buying a home, and how quickly you want to move. If you’re casually looking at houses but not necessarily planning to make an offer, a pre-qualification works great.
If you’re ready to buy a home soon, especially if you’re in a competitive market, you should get pre-approved for a mortgage before you start your home search. Even better, obtain an underwritten pre-approval letter. A fully underwritten pre-approval is the best and most comprehensive mortgage pre-approval a homebuyer can receive.
Every lender handles mortgage approvals differently, so you’ll want to talk to your real estate agent or mortgage loan officer about which option is best for your situation.
Pre-qualified vs. pre-approved FAQs
Can I skip pre-qualification and get pre-approved?
Yes, you don't have to be pre-qualified to get pre-approved. If you know you're financially ready to buy and want to start home shopping, you can skip pre-qualification and apply for pre-approval.
Does a mortgage pre-qualification or pre-approval affect your credit score?
A pre-qualification will not affect your credit score, as the lender only performs a soft credit inquiry to determine whether or not you qualify for a loan. However, with a pre-approval, the lender performs a hard credit inquiry to thoroughly review your credit report. This can temporarily cause your credit score to decrease a few points. Pursuing pre-approval with more than one lender will result in more credit inquiries, but as long as the inquiries come within the same 45-day period, they won’t multiply the impact on your score.
How long does a pre-qualification, pre-approval, and underwritten pre-approval take?
Because pre-qualification is a less complex process, it usually happens more quickly than pre-approval — it can even happen in a matter of minutes over the phone or seconds online.
Pre-approval normally takes a few days, though it’s possible to get approved in a single business day in some cases. If your finances require more investigation on the lender’s part, the process can stretch longer, as well. For a fully underwritten pre-approval, it takes, on average, about 1 to 2 weeks to complete the process.
The process to obtain a mortgage pre-qualification or pre-approval can seem complicated, but it’s a lot easier when you have your paperwork in order and understand each step of the process. A mortgage lender can help you every step of the way to get you pre-qualified, pre-approved, and guide you through the mortgage loan process.