Pre-qualify vs Pre-approval: What’s the difference?

Before you start looking for a home in earnest, though, you should get pre-qualified for a loan. Ideally you’ll get pre-approved. To do that, you’re going to need to talk to a loan officer. What’s the difference between a pre-qualification letter and a pre-approval letter? And how can you find a good mortgage lender or loan officer to work with? Let’s break it down.

Why Getting Pre-qualified Or Pre-approved Is Important

It’s one thing to calculate your home affordability on your own. It’s another thing entirely to have a letter from a mortgage company that says you qualify for that number. Before a seller will accept your offer, they want to know that you’ve done your homework and that you will actually be able to follow through on the purchase. This is especially true if you’re bidding against someone else for the home – they don’t want to accept your offer, then three weeks in have the deal fall apart, forcing them to start the sales process again from scratch. All things equal, the seller is going to take the least-risky offer.

Mortgage Pre-qualification vs. Pre-approval

Often times people use these terms interchangeably, but they actually have a huge difference that’s important to understand.

A pre-qualification letter means you went to a company, they took a very basic look at your information, and they came up with a maximum loan amount that they think you can afford. Think of this like dating. You’re interested, but you’re still feeling it out and you don’t want to over commit. The lender will ask you some basic information & determine your affordability using the relevant mortgage factors – income, credit score, existing debt, etc.

The thing is, a pre-qualification letter is barely better than an eye-ball look at it. Yea, it’s more accurate than some random calculator you found online. But the lender hasn’t done much work researching your personal history, the loan product, or the area where you are looking to buy. They may not even pull your credit score, which means the interest rate they are offering you is a guess based on what you think your credit score is. At worse, the interest rate is their teaser rate, which you may or may not qualify for.

A pre-approval letter, on the other hand, carries a lot more weight than a pre-qualification letter. Think of this like getting engaged. You’re definitely not married yet, and you still have the chance to bail, but there’s a higher level of commitment here. You spend more time together and build a deeper relationship.

To get pre-approved for a loan, your mortgage company will pull your credit and ask more detailed questions about your debts, financial assets, and employment history. They’ll enter all this information into their system that analyses how risky the loan is. When they’re done, they’ll give you a letter that has the maximum loan amount you qualify for. The interest rate on that loan will be more accurate and specific to you personally because you’ve gone through an initial underwriting process.

The main difference is a pre-approval letter will also usually come with some “conditions.” The approval conditions lay out the requirements for your particular circumstance, and they act like a promise from the lender. If you meet the conditions listed, they are very confident you can afford the maximum loan amount listed and will be able to close the loan.

Due to the extra work that goes into generating a pre-approval letter, and the fact that it comes with a commitment from the lender if you meet the criteria, they are more effective when you bid on a home. The seller and their real estate agent will have more confidence that you can actually follow through on closing the deal. It should also give you, as a buyer, more confidence when you go to submit an offer – you’ve gone through this process, you have your approval conditions, and you know exactly what’s expected of you.

With just a pre-qualification letter, you may submit an offer only to find out that your loan officer missed something, or your credit score isn’t as good as you thought, and your max loan amount is much, much lower. In my mind, this is a nightmare scenario, and you want to avoid any last minute surprises if possible.

When to get pre-approved for a home loan

We always recommend getting pre-approved for a loan before submitting an offer. However, that doesn’t mean you should rush out and get pre-approved immediately. There are benefits to starting with a pre-qualification letter –

  • It’s an easy way to estimate your home affordability – pre-qualifying is easy. In many cases, you can do it online in a few minutes, and it’s an easy way to verify your estimated home affordability is at least in the ballpark.
  • It allows you to shop – you can go to multiple companies, go through the loan pre-qualification process, talk to a loan officer, and see what they quote you with. It’s a no-commitment way to see if you like the company, test the relationship, and see how competitive their interest rates & closing costs are.
  • It doesn’t affect your credit – When a mortgage company pulls your credit, it’s only valid for a limited period of time. Every lender is different, but let’s assume the limit is 120 days. After 120 days, the lender will pull your credit again to make sure nothing has changed. That 120 day clock is based on the day your loan closes. If you get pre-approved right away and then take your time finding a house, you might miss that window. Having a lender do a hard credit inquiry over and over again can negatively affect your credit score and actually hurt you when it is time lock your rate.

The way I look at it, your timeline should look something like this –

  1. Do your research, understand what goes into a loan, and set some savings, debt reduction, and budget goals.
  2. Calculate your home affordability & see if it lines up with your expectations.
  3. Pre-qualify for a loan, talk to different lenders, see which company you want to work with long term.
  4. Explore the different neighborhoods that meet your criteria. See our article about what to look for when shopping for a home for some inspiration.
  5. Narrow down your home search & get pre-approved for a loan.
  6. Make an offer on offer on a home and (hopefully) get accepted.
  7. Do a full loan application to get your loan estimate and compare the true cost of working with each lender.
  8. Choose a final lender to work with and seal the deal!

Following this path, you ease your way into the process. At any point prior to step 5, you can stop, delay, or take a step backwards without affecting your credit score, risking any money, or feeling any pressure to do something you’re not comfortable with.

How to find a loan officer and mortgage lender

There are a number of ways to go about this. There is no right or wrong way, but there are some specific things you should look for.

You can always ask for personal recommendations – reach out to friends, family, or post on Twitter and Facebook. You’re bound to get a few names this way. Google can be a great resource when researching a particular company, and Yelp can often have customer reviews for a particular branch or loan officers. I’ve generally been unimpressed when going down this route, but home search sites like Zillow, Trulia & Realtor.com will happily recommend a mortgage company to you.

Choosing a loan officer – what to look for

Once you have some loan officers or companies in mind, we recommend doing a few things:

Get in touch – Reach out, pre-qualify with them, and see how it feels. Do you like the person you’re working with? Do they seem like a good personality fit for you? Do you communicate well? Getting a mortgage can be stressful, are they going to make this process easier, or will you butt heads when things get rough?

Compare pricing – Each lender will have their own interest rate & closing costs. An easy way to do an apples-to-apples comparison at this stage is to look at the APR, or annual percentage rate. This is a combination of the interest rate and the fees combined. It will give you a better idea of the true cost of the loan. Pro-tip – if the APR is significantly higher than the interest rate, that usually means you’re paying more cash up front in loan closing costs.

Ask questions – If you’ve read through the guide up to this point, you’re far more informed than the average first time home buyer. Ask the loan officer questions and see how they respond. A good loan officer earns their commission, especially on a complex loan. However, some loan officers aren’t well informed, or may even give you information that is just plain wrong. The industry has changed a lot since the financial crisis, your loan officer needs to be up to speed with the regulations & trends. Some things you could ask about –

  • How long do their loans typically take to close?
  • What percentage of their loans close on time? What steps do they recommend you take to make sure this happens?
  • How do they prefer to communicate? Phone, text, email, fax machine, in person meetings, smoke signals? Do your preferences line up?
  • How do they collect things like documents? Via email? Do they have an online portal? Fax? (I’m serious, some lenders use fax machines still, do you want Father Time as a loan officer?)
  • Are they experienced with other borrowers like you? If you’re self employed, looking to rehab a property, or have some other non-standard scenario, it’s important the loan officer has experience with that type of transaction.
  • What you can do now to make closing your loan easier down the line?

Research the company – the mortgage companies are going to hate me for this… But the CFPB makes consumer complaints publicly available. You can go to this database, type in a lender name, and see what kind of complaints they’re getting. You can also see the company’s response. Take these with a grain of salt, often times people are just mad they couldn’t qualify for a loan. Many times the company makes the right call and the person is just disgruntled. But a quick search may help you avoid a bad lender, definitely dodging a bullet.

The Good, the Bad and the Ugly

The Good – loan officers worth their salt are going to fight for you. They’re on your side, they understand your particular situation as a borrower, they know a bit about your property, and they’ll work with your realtor. They will tell you if something isn’t attainable. They’ll work proactively to avoid problems. They’ll fight for you when problems do arise (and there will almost always be a hiccup.) They’re in sync with their team members. And the really good ones will help you stay positive and motivated through the ups and downs of the process.

The Bad – an uninformed loan officer can completely derail you. They may be too busy and not pay you the attention you deserve. They may not remember your specific situation when you talk to them. They’re not in sync with their team and give you conflicting information. They’ll ask for the same document multiple times. They might miss something important that delays the closing date. Or in the worst cases, they’ll give you bad advice out of the gate, and then at the last minute leave you scrambling to figure out how to close your loan. If you actually do manage to close the loan, despite their oversights and bad service, they still collect their commission – salt in your open wound.

The Ugly – this is rare, and they’re usually easy to spot, but some loan officers are completely self-interested. They don’t care about you or your loan. They don’t care if you can afford the mortgage they are selling you. They don’t even want to deal with you through the process, so they hand you off to an underling. All they care about is getting you to sign the loan documents so they can make their commission.

It’s worth putting some time in to shop around and find the right partner, you want someone you can trust while you’re working through a potentially stressful process!

Testing the waters with a pre-qualification letter

We recommend getting pre-qualified for a loan as early as possible, either online or with a loan officer that you like. That pre-qualification letter will show what your mortgage payment would be for homes in your price range – if it’s higher than your rent, pretend like you’re paying your new payment and use it as a way to save more money for your down payment or emergency fund. Take the difference every month and transfer it into your home savings fund – it’s an easy way to save, and it’ll let you see how that new payment amount affects the rest of your budget & lifestyle.

Better yet, set up that auto-transfer into your house fund so you don’t even have to worry about it!

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