The Difference Between Pre-Qualified And Pre-Approved, According To Our Real Estate Expert
Owning your home is the pinnacle of adulthood (and hard work) for most people. Unfortunately, this journey is far from easy unless you've been actively keeping up with the real estate world or had a stint at finance school. From down payments, mortgages, and closing costs to the numerous extra expenses that might sneak up later, there's plenty of financial jargon to wade through. But the cake goes to mortgage lenders, who love confusing homebuyers by throwing terms like pre-qualified and pre-approved their way – sometimes interchangeably. So, to demystify the specifics, we sought real estate broker Trey Danna, and here's what he had to say in an exclusive interview with House Digest.
"Pre-qualification provides a ballpark estimate of how much someone can borrow based on data provided by the borrower. This can be done over the phone or online and usually has no cost associated with it." The data in question can be self-reported, rough estimates of incomes, or bank details to help the lender guesstimate if you qualify for a mortgage. In contrast, Danna explained that pre-approval goes a step ahead by offering the borrower a "...definitive answer of how much can be borrowed along with an interest rate."
Pre-approved offers involve a deeper analysis
Speaking to House Digest, Trey Danna elaborated on the mortgage pre-approval process. "The buyer completes a mortgage application with the lender," he said. This empowers the lender to "perform a credit history check," providing them with the debt-to-income ratio, a key metric for ascertaining qualification and the loan amount. In addition, they "review assets, bank balances, and job history."
On prompting for specifics to get a pre-approved offer, Danna revealed that borrowers must render "current pay stubs that show income and YTD (year-to-date) income, W-2s and tax returns for the last two years, and proof of any additional funding sources, such as bonds, alimony, side hustles, social security, etc.," to the lender. He added that providing "proof of assets through bank statements and investment accounts" is necessary, as is proving "good credit." He noted that homebuyers must authorize "the lender to pull their credit report." However, since the act counts as a hard inquiry, this may temporarily lower their credit scores. Danna listed other essentials, including a homebuyer's "employment verification, social security number, and driver's license (or any other form of acceptable ID)."
On the flip side, "pre-qualification is a 'soft' look into your finances" — in fact, our expert pointed out that "the lender is relying on buyers telling the truth about their situation." Such offers "do not require the buyer to provide proof of the buyer's credit, finances, or job history."
Pre-approval provides marked advantages during price negotiations
Although the ease of getting a pre-qualification — not to mention the time and cost savings — may have some potential homebuyers thinking they're all set to join the housing market once they have an offer, it's not true. The reason? "Pre-qualification doesn't guarantee pre-approval," explained Trey Danna. Pre-qualified offers "...give a ballpark idea of how much you can qualify for," but that doesn't mean you will. For certainty, look for pre-approved offers, which involve a rigorous analysis stating the "definite" qualifying amount. Danna continued, "Some lenders go an extra step and send the file to an 'in-house' underwriter, which results in a pre-underwritten pre-approval." This means the lender guarantees the specified amount, should you avail it instead of just qualifying.
Given how lenders continue to reject mortgage applications — 12.1% were refused in 2023 alone (via the Federal Reserve Bank of New York) — having the lender's assurance means buyers can follow through with the payment. "In a competitive market, this type of pre-approval will give a buyer an advantage over other buyers that have not gone this extra step," stated Danna. However, he cautions that borrowers must be "upfront" with their lenders about past financial events that may affect their ability to borrow and get the necessary help. He also advised "having all your ducks in a row" to shorten the pre-approval time.