Question: What’s the Difference between a Pre-qualification and a Pre-approval for a Mortgage?
Answer: Unfortunately, there is no absolute definition for the terms of Pre-qualification or Pre-approval. The definition depends on the Lender who is issuing the terms/letter under which they are willing to loan money. When purchasing a home or evaluating a potential buyer for the sale of your home as an owner, a better question to ask is: “What does the Pre-approval or Pre-qualification actually allow me to do“?
Ideally, a full Pre-approval means that the Lender has verified the accuracy of the documentation a potential borrower supplied pertaining to finances, employment and rental and home ownership history. It would also indicate that credit has been fully vetted with a mortgage report combining the results from three agencies and the borrower’s debt to asset ratios are appropriate to support the loan that is being requested. The pre-approval would then amount to a check held in earnest pending finding a home which also meets the requirements necessary for the Lender to finance the purchase.
Unfortunately, there are significant variations in the use of both terms. Generally a Pre-qualification carries the least amount of weight because it is filled with caveats and is often not fully verified and/or documented in the way most standard Pre-approval letters are. While a Pre-qualification can serve as a good starting point when you are thinking about making a home purchase, you may find that the terms and conditions for an actual loan are different from your initial Pre-qualification. Since the Lender has not necessarily verified the information you supplied during a Pre-qualification, there is no promise that a borrower will be in a position to qualify for a loan.
For an owner considering a purchase transaction, it may be prudent to request that a potential buyer submit to a Pre-approval process prior to taking your home off the market. It would also be wise to check with the Lender to verify the steps that have been taken to ensure that the prospective buyer is financially qualified to purchase your home.
About the FAQ (Frequently Asked Questions Series)
This series is designed to answer questions that we hear clients asking over and over again. Perhaps, you’ve wondered about some of these questions yourself. While this is not intended to be an exhaustive explanation on the subject being discussed, it is our hope that these short blogs will provide helpful insights and may encourage you to explore further. Please feel free to contact us by phone or e-mail with any questions.