Pre-qualification versus pre-approval: which is better?

You’ve probably hear the terms “pre-qualification” and “pre-approval” thrown around a lot when it comes to home loans.

So what’s the difference? Glad you asked, because there is a BIG difference between the two and it can impact how seriously a seller takes your offer.

First of all, it’s a good idea always to talk to a lender before submitting an offer on a home. You will learn how much money they feel comfortable lending you, what sort of interest rate they are offering, and more importantly, you will get an estimated monthly payment amount that includes taxes and home insurance as well as principal and interest.

This initial conversation with the lender, in which you fill out a loan application is known as a pre-qualification. The lender is simply looking at the information you provided in the application about your income, assets and debts and spitting out a number they feel comfortable lending you.

When submitting an offer on a home, it’s perfectly fine to submit along with that offer a pre-qualification letter from your lender. And often this is enough to satisfy the seller, and then you build time into the contract to get full approved by the lender before closing on the home.

However…in a really competitive market like Austin, especially when you are in competition against cash offers, it’s a good idea to go ahead and get fully pre-approved by a lender before submitting an offer.

Being pre-approved means you have gone through underwriting. It involves submitting things like bank statements, tax records, pay stubs and other items to actually PROVE you have the income you say you do, as well as verifying your assets and debts through credit reports and other means.

Not all lenders will do a full pre-approval without a property address but some will! I have a list of lenders I rely upon when I need a pre-approval for a client who is still shopping and doesn’t have a property in mind.

If you have a pre-approval letter in hand when submitting an offer, it’s almost as good as cash because the seller won’t have to worry about the deal falling apart over financing. Cash is usually still preferred because it usually means there will not be an appraisal, but getting a pre-approval certainly helps you look a lot better than the other buyers who may only be pre-qualified.

Questions about pre-approval versus pre-qualification? Don’t hesitate to reach out: lilly.rockwell@cbunited.com.

Lilly Rockwell is a licensed real estate agent and a former journalist.

Author: Lilly Rockwell

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