Pre-Approval and Pre-Qualification: What's the Difference, and Is One Better Than the Other?

If you're getting ready to buy a home in St. George and you won't be paying for it in all cash, understanding your mortgage options is key. One of the most crucial steps to prepare to make a strong offer on a home is applying for a mortgage before you begin house hunting. This will help you know your budget and what homes to consider. 

You have a couple ways to do this: pre-qualification and pre-approval. If you're wondering what the difference is and if one of them is a better option than the other, you're in the right spot. 

What is pre-qualification?

Pre-qualification is the initial step in the mortgage process where you provide a lender with basic financial information. This is typically a casual process and can be done over the phone, online, or in person. The lender will ask you for information about your income, debts, assets, and credit score and then they will give you an estimate of how much you might be able to borrow based on what you share.

It's not going to involve a formal review of your financial documents, so it is a relatively quick and informal process. Think of it as a rough calculation or a ballpark figure of your borrowing power. It's a great starting point that won't involve a hard inquiry to your credit or take much of your time.

What is pre-approval?

Pre-approval is a much more detailed and formal process. It goes beyond pre-qualification and will take a bit more of your time. When you apply for pre-approval, you complete a mortgage application and submit documentation for the lender to verify your financial situation, with paperwork like pay stubs, tax returns, bank statements, and your credit report.

The lender will perform a thorough check of your credit and evaluate your financial standing to determine whether you qualify for a mortgage and, if so, how much they are willing to lend. If you get approved, you will receive a pre-approval letter that specifies the loan amount you are qualified for, as well as any conditions you need to meet to close the loan. You'll find out what your interest rate will be and have a firm idea of what to expect as long as your financial situation doesn't change. 

Does it matter which one I get?

Many buyers wonder if it matters whether they get pre-approved or pre-qualified. For example, some buyers are comfortable with the estimate provided by being pre-qualified and don't want to spend the time gathering all the documents. Others know they would like to have a more solid picture of what the mortgage payments would be and prefer to get the paperwork out of the way. 

Personal preference and risk tolerance will inform this part of the process, but it's important to consider how your offer will look with pre=approval versus pre-qualification. There are some serious benefits to getting pre-approved and not just pre-qualified in a competitive market. Because you're going to go through the paperwork process at some point anyway, it makes sense to do it before you're house hunting. Here's why pre-approval matters:

• Increased Credibility with Sellers: In competitive markets like St. George, sellers often receive multiple offers. A pre-approval letter can give you a significant edge because it shows the seller that you’ve already been vetted by a lender and are likely to secure financing. A pre-qualification letter doesn’t carry the same weight because it’s based on unverified information.
• Clearer Understanding of What You Can Afford: Pre-approval gives you a much clearer idea of your budget since it is based on a thorough review of your financial situation. With pre-qualification, you might think you can afford more or less than you actually can.
• Faster Loan Approval Process: Since pre-approval involves much of the documentation and verification that is required for final loan approval, it can speed up the closing process once you find a home you want to buy. This is especially important if you’re in a bidding war, where the ability to close quickly could make a difference in your offer being selected.
• More Accurate Interest Rate Offers: Lenders can offer more accurate interest rate quotes with a pre-approval because they’ve already reviewed your credit and financial information. This can help you better estimate your monthly payments and the total cost of your mortgage.

To sum it up, Erika Rogers explains it this way: "Pre-qualification can be a good first step to find out if you're ready to buy a home, but it shouldn't be all you do before you start house hunting. Go ahead and get pre-qualified, and then if you're serious about moving forward take the extra steps to secure pre-approval so you're ready to make strong offers."

Ready to find homes for sale in St. George? Contact us any time to find out how we can help.