If you have been looking around for real estate and mortgage plans for a time now, then you have undoubtedly heard of terms like “Pre-Qualification” and “Pre-Approval”. Unfortunately, there are some misunderstandings with their usage. Many people assume they both mean the same thing because they sound like similar ideas.

While it is true that they both refer to something that happens before the mortgage is approved, they actually refer to two different phases of the mortgage process. Understanding these two terms and their relationship to a mortgage is very important if you want to avoid any problems or end up setting the wrong expectations.

To resolve any confusion that someone might have and save people a lot of frustration, let’s learn about both the terms and what they mean.

Pre-Qualification

There are different phases to the mortgage process, the first step involves your consultation with the mortgage loan officer. At this time you will explain what you’re looking for to the mortgage officer, who will ask you questions to better understand your wants and needs. The mortgage officer will then explain the different mortgage plans that will help to meet your needs.

This discussion leads to talking about your financial position where you will inform the mortgage officer about things like income, monthly debts, your assets, etc. Keep in mind that no financial reports are handed over and no deep-dive into your finances takes place, the discussion is verbal only. And based on this discussion your mortgage loan officer will provide an estimate about the financing the lender will be able to offer you. This phase is known as Pre-Qualification.

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In Pre-Qualification, the mortgage loan officer provides you with an un-guaranteed estimate about the amount of financing you could have if your financial reports don’t change the lender’s expectations. At this point, you are not qualified for the mortgage that can only happen after your financial reports have been submitted and cleared by the lender. And to help to proceed further the lender will provide you with a Pre-Qualification Letter. This letter can be shown to sellers. The letter indicates that you’re a serious buyer and have already started your mortgage process, it also shows the seller that you do potentially qualify for the required amount that meets their demands.

Pre-Approved

Approval of a mortgage is the final stage of the process. Pre-Approval refers to the phases before this final step. To approve your mortgage, the lender will require you to submit all your financial documentation for underwriting, where your documents will be submitted to an expert who will comb through your reports to confirm your creditworthiness. The underwriting process can take weeks to complete as it requires a lot of verification of the documents submitted. Documents required for underwriting will be your paystubs, tax return forms, bill payments, etc. All documents that either verify your details or provide additional information about your handling of finances and debt are required for underwriting.

Once the underwriting process is complete a report will be provided to the lender, who will use it to provide the final confirmation about the financing they will approve you for, should you proceed with the mortgage process. If you proceed, your loan approval will begin. After the underwriting is complete, you can request the lender to provide you with a Pre-Approval letter. This letter will show that you have almost completed the mortgage process and the lender has provided you with a loan amount that is confirmed, based on your financial reports. Just like with the Pre-Qualification letter, the Pre-Approval letter can be shown to sellers of a property because it indicates your seriousness as a buyer.

While the Pre-Qualification letter only provides an unconfirmed estimate, the Pre-Approval letter marks you as someone further along the mortgage process. This difference gives Pre-Approval letters higher precedence over Pre-Qualification and is more likely to impress a seller.

Key Differences between the two

Pre-Qualification

To be Pre-Qualified, the following apply:

– The borrower does not necessarily need to fill a mortgage application form
– The borrower does not need to pay any application fee
– The borrower does not need to provide credit or financial reports
– The borrower does not need to discuss a down payment
– The lender will provide an unconfirmed estimate that the borrower might get
– The lender will not provide any information about the applicable interest rates

Pre-Approval

To be Pre-Approval, the following apply:

– The borrower has to fill a mortgage application form
– The borrower has to pay any application fee
– The borrower has to provide credit or financial reports
– The borrower and lender will discuss a down payment
– The lender will provide a confirmed and specific amount for after approval
– The lender will advise the borrower about applicable interest rates

Is it better to be Pre-Qualified or Pre-Approved?

Like with all things related to the mortgage process, whether you want pre-qualification or pre-approval depends on your goals. Both are part of the mortgage process and you will go through both phases at some point. The position of the phases in the process as a whole does provide some indication about how they can be utilized in the best possible ways.

Since Pre-Qualification takes place early on in the process, it can be a good way to shop for mortgage plans in the market. Different lenders will be offering their own estimates and by speaking to multiple, you can get a well-rounded idea about the kind of financing you can obtain. You can get Pre-Qualified in 1 to 3 days without having to provide a lot of information. Thanks to the pre-approval letter you will have an easier time keeping track of which lender provided you with what estimate and details. The Pre-Qualification letter can also be shown to sellers when you are shopping for homes in the real estate market.

The Pre-Approval phase takes place letter on, which means someone at the phase has already chosen a lender and has decided to move ahead with their offer. If you are at this phase then you will have paid the lender for the mortgage origination. Once the underwriter has provided the report on your finances, the lender will tell you their final offer based on your reports. This amount offered in this phase is the real deal that you can use to learn how much house you can really afford with the lender’s financing. The Pre-Approval letter provided after this phase is more likely to impress a seller than the Pre-Qualification letter, because it is evidence that you are almost done with the process, if the seller is in a hurry to sell the property then this letter will make you and your offer stand out even more.

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