A pre-qualification is a quick, unverified estimate of how much you might be able to borrow. A pre-approval goes a step further and gives sellers a much higher credit score by verifying your financial situation and reviewing your application.
If you’re ready to start looking seriously at buying a home, a pre-approval is usually what you need.
Pre-approval vs. pre-qualification, The key difference
The CFPB points out that lenders don’t always use these terms interchangeably, so the title alone doesn’t tell you much. The more important question is whether the lender is relying on the information you provided or the information they have actually verified.
- Pre-qualification usually begins with you providing the lender with information about your income, debts, and assets, without any supporting documentation.
- Pre-approval usually involves a credit check and reviewing documents such as pay stubs, tax returns, or bank statements before the lender determines how much you may qualify for.
Once this review is complete, some lenders will provide a written commitment for a specified period of time that can be more binding when you make an offer to purchase.
Because pre-approval involves a factual review of your financial situation, sellers and real estate agents tend to take it more seriously. Pre-qualification can be helpful in getting an initial idea of ​​your budget, but it doesn’t have the same validity when you’re ready to negotiate or make an offer to purchase.
How long does pre approval last?
A pre-approval letter is not valid forever. The CFPB notes that these letters usually have an expiration date, often around 30 to 60 days, although the exact period depends on the lender. After expiration, the lender may need to update your file, which can include re-checking your credit and updating financial documents.
The reason for expiration is simple: Your financial situation and the housing market can change quickly. Lenders want to make sure the credit, income, and debt information that supports your preapproval is still up-to-date when you’re ready to buy, rather than relying on information from a few weeks ago.
If you’re still looking for a home and your preapproval is about to expire, contact your lender before it expires. In many cases, the lender can update the approval fairly quickly if there haven’t been any major changes to your financial situation.
What actually happens during prequalification?
Prequalification is designed to be a relatively quick process. You provide basic information about your income, debts, estimated down payment, and other financial circumstances, and the lender uses these numbers to estimate how much you might qualify for.
A hard credit check is not usually required, and the information you provide at this stage is usually not independently verified. For a more detailed explanation of the process and how to get started, see our guide to mortgage prequalification.
Think of prequalification more as a budgeting and planning tool than a final approval. It can help you determine your likely price range before you start looking seriously, but it shouldn’t be used as evidence you rely on when you’re ready to make an offer.
Getting Pre-Approved: What Does a Lender Actually Approve?
A pre-approval is much closer to an actual mortgage application, although you haven’t selected a specific property yet. You typically provide documents like pay stubs or tax returns and bank statements, and you also allow the lender to check your credit. An underwriter then reviews this documentation and compares it to the income and debt information you provided, before issuing a pre-approval letter.
Since pre-approval involves a credit check, it’s helpful to understand how multiple mortgage inquiries affect your credit. The CFPB explains that multiple mortgage-related credit checks made within a 45-day period are generally considered a single inquiry, not separate inquiries. So, comparing preapproval options from multiple lenders shouldn’t hurt your credit significantly, as long as you inquire with multiple lenders in the same timeframe.
Ready to get started? You can start the preapproval process right away, or schedule a preapproval consultation if you’d rather talk to a loan officer about your situation first.
Preapproval for Investors, DSCR Loans Work Differently
If you’re buying an investment property instead of a home you plan to live in, the preapproval process may not focus on your personal income like a traditional mortgage. With a DSCR loan, the lender looks primarily at the property’s expected rental income compared to its mortgage payments, rather than relying primarily on your W-2 income or tax returns. As a result, an investor’s pre-approval process can be quite different from that of a typical home buyer, focusing more on the property and the numbers involved in the transaction.
If the property is for rental income, let your loan officer know from the start. This can help them guide you through the proper pre-approval process, rather than starting with a conventional mortgage application.
What happens after pre-approval?
Pre-approval is not the end of the mortgage process. It’s where the rest of the process begins. After you have a signed contract for a property, your loan typically goes through a full credit check, property appraisal, and other required steps before the deal closes. For a detailed look at what happens between conditional approval and receiving the keys, check out our guide to getting from conditional approval to closing.
