What’s the difference between pre-qualification and pre-approval? The two terms are often used interchangeably, both by homebuyers and by some real estate professionals. However, they have completely different meanings and it’s important to know the difference.
In a nutshell, a mortgage pre-qualification generally occurs when you fill out some basic information in order to obtain a rate quote. It is often a quick and informal process, and different lenders have different methods of pre-qualifying borrowers. It is ok to shop around and get several pre-approval letters.
You may wonder if you shopping around getting pre-approval letters won’t hurt your credit score? There’s a special rule in the FICO credit scoring formula that encourages rate-shopping. Specifically, any mortgage applications you make within a “normal shopping period” — which is generally defined as two weeks — will count as a single credit inquiry for scoring purposes. In other words, whether you apply for pre-approval with one, two, five, or 30 mortgage lenders, it will have the exact same impact on your credit score.
The key point is that it does not represent an actual commitment to lend you money. Meanwhile, a mortgage pre-approval is a lengthy and thorough process, and having a pre-approval letter in your hand can carry a lot of weight when you’re shopping for a home.
The most important thing to know about pre-qualification, from the perspective of both buyers and sellers, is that just about anyone can get a pre-qualification for a mortgage.
This isn’t to say that a pre-qualification isn’t useful. Quite the opposite, actually. A pre-qualification can be a great way to get an idea of how much you can afford to borrow and is an excellent first step before you start browsing real estate listings. Just remember that a pre-qualification typically isn’t a commitment to lend you money.
A mortgage pre-approval is a thorough process. The lender will check your credit, and may verify your employment history, income, and other assets. In short, the pre-approval process is a mortgage application, only without a specific home attached to the application.
Here’s a sampling of what you may need to submit to a lender (in addition to an application packet) in order to obtain a pre-approval, but this is by no means an exhaustive list:
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