Mortgage Pre-approval and Prequalification

The majority of people searching for a home of their own can’t afford to pay in cash and, thus, need a mortgage in order to finance the transaction. Mortgage jargon is specialized and difficult for most people to make sense of. Mortgage pre-approval and prequalification may seem at first glance to mean the same thing, but they don’t. In fact, people in the mortgage and real estate industry often interpret these terms differently. Most realtors will tell you the difference lies in documentation and verification, meaning simply that one provides documentation (pre-approval) while the other is merely verbal (prequalification).

Prequalification Versus Pre-approval

Pre-approval is preferred over prequalification because a person’s information has been fully processed and acknowledged. Prequalification involves contacting a mortgage lender and giving them some standard information, such as a current address, how long you’ve lived there, annual income, social security number, permission to check your credit report, and (sometimes) the amount of your down payment. The lender then runs your information and contacts you– generally within an hour– with an estimate of the amount you’re eligible for. Seeing as how they haven’t verified your information yet, the prequalification letter has several disclaimers safeguarding them against liability. However, not all lenders use prequalification, and some prefer more concrete information.

With a mortgage pre-approval a lender will ask you for the previously mentioned information in addition to proof of work history (around two years), income tax information or pay stubs, and copies of bank and credit card statements. The processing time is, obviously, lengthier with a pre-approval, but it’s also more reliable, decreases the mortgage application time, and allows for a faster closing time. Pre-approval ensures that the mortgage process doesn’t fall apart after a buyer has paid all the fees for their new home due to errant prequalification information. Furthermore, pre-approval can save you time in the long run because it allows you to focus on purchasing your home rather than waiting on the edge of your seat for your mortgage application to go through while simultaneously worrying about the house itself. In short, try to obtain pre-approval for your mortgage loan instead of the less definite prequalification letter.