Both pre-qualifications and pre-approvals are indications of what a bank or creditor may be willing to lend but are not loan guarantees. The most important aspect is that they show the seller you are serious about buying while giving you an idea of what you may be able to borrow. Both processes will vary depending on the lender that you select. Before you request a pre-qualification or pre-approval, be sure to ask your lender about how the process will flow, potential associated costs, whether your credit report will be pulled and if documentation will be required. Ask for a list up front so you can know exactly what you’ll need to provide.
Pre-qualification
What: A letter from a lender that says you will likely be able to get a mortgage loan up to a specified amount
Who: A bank, credit union, or financial entity writes a pre-qualification for you. Which means they are looking at your debts and income to decide your credit worthiness.
When: Usually this is the first thing a homebuyer does when looking for a home
Cost: Free (usually)
Where: Online or over the phone (depending on entity)
Why: Potential homebuyers use this to see how much of a home they may be able to afford, or in some cases if they can afford a home. This appeals to sellers because it shows them as a buyer you are serious and can get the loan you need to purchase the home.
What you’ll typically need to provide: Usually potential lenders will look into your debts and income. Lenders usually pull a credit report to evaluate before they write the pre-qualification.
Pre-approval
What: A letter that tells you what a lender is willing to lend you based on financial documentation you provide. Looks at financial history, income, and stability.
Who: A bank, credit union, or financial entity works on a pre-approval for you. Which means they are looking at your bank statements, proof of income, credit, employment, and personal documentation.
When: Usually done right after a green light on a pre-qualification, the next step, some lenders may skip pre-qualification and go straight to pre-approval.
Cost: Varies (but usually a cost is involved for application)
Where: Online or over the phone (depending on entity)
Why: It’s more sound than a pre-qualification because approvals are based on proof of financial status and often evaluated by an underwriter. Can usually provide info about mortgage types and possible interest rates.
What you’ll typically need to provide:
- W-2 from last 2 years (proof of income)
- Bank statements (assets)
- Credit score
- Pay stubs (proof of employment)
- Driver’s license
- Social Security # (personal documentation)