Does Pre-Qualification Mean I’m Approved?

When it comes to mortgages, pre-qualification and pre-approval may seem interchangeable, but they actually mean different things and hold different weight when it comes to submitting an offer on your dream home.

Mortgage pre-qualification helps lenders to understand how much you can borrow by asking you a few questions about your finances.  For example, they will ask about your income and whether or not you have a down payment saved up.  They may or may not ask you other basic info about your credit score or monthly debts.

They then review this info, usually without ever actually verifying it, and give you a quote that is based on estimated figures.  This is a quicker process than pre-approval, but that is because it is only an estimate and not actually factual. This is the weakest kind of financial assurance a buyer can convey to a seller in a real estate transaction. Pre-qualification can be used a guide to help you narrow down your price range, but aside from that, they aren’t good for much more.

Pre-approval, on the other hand, is a much more robust indicator of your ability to secure a home loan.  This process goes a step further by verifying your credit and financial documents, including pay stubs, W-2 statements, and sometimes 1099 and tax returns.

This process will help to determine a debt-to-income ratio which tells the lender exactly how much you can borrow.  Along with the pre-approval, you will also get an itemized estimate of interest rates, closing costs, monthly payments, and the maximum amount you’d be approved to buy.

Having a pre-approval is the lender confirming that you are a fully approved buyer.  Pre-approval can mean the difference between getting an offer approved on a home or losing it to another buyer.  Real estate agents know or at least they should), that pre-approvals mean more than pre-qualifications (and they’ll rarely look down on an offer that doesn’t include a pre-approval letter), especially in this market we are currently in.

Then finally there is the underwritten pre-approval which makes a buyer as close to cash as you can get. This is where a lender essentially uses their letter as a commitment to lend. This essentially says: they’re underwritten and fully vetted and as long as they remain employed, can get insurance, the home appraises and they pass a final credit check, they’re approved. As you can see, the lending world and these letters can get tricky. My team and I only use lenders who issue the last option. It makes a big difference when competing for property and one of the reasons I push so hard for my buyers to use certain lenders. Technically, I can’t dictate who buyers use, but after I explain this to them, they usually fall in line with using someone who issues more serious approvals.

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