Pre-Qualified vs. Pre-Approved: What the Difference Means When You Make an Offer

Buyers often use "pre-qualified" and "pre-approved" as if they mean the same thing. Lenders do not always use the terms consistently either, which makes it more confusing. What matters is not the label on the letter. It is how much of your financial life the lender has actually checked.

Pre-qualification: a conversation

A pre-qualification usually means you told a lender about your income, debts and savings, and they gave you an estimate of what you might be able to borrow. It is quick, and it is a perfectly good first step when you are just figuring out a budget.

The weakness is that it is largely based on what you said. Nobody has verified it yet.

Pre-approval: a file

A pre-approval normally means the lender has gone further. Typically that includes pulling your credit and reviewing documents such as pay stubs, tax returns, W-2s and bank statements. The letter that comes out of that process is based on verified information, so it carries more weight.

Even then, a pre-approval is not a final loan approval. The home itself still has to appraise and meet the lender's requirements, and your situation has to stay the same through closing.

Why sellers care

When a seller compares offers, price is only part of the decision. They are also asking: which of these buyers is most likely to actually close? A letter that shows your finances were reviewed answers that question better than one that shows you had a phone call.

That can matter most when a home has more than one interested buyer. Two offers at the same price are not equal if one buyer has a verified file and the other does not.

Questions to ask your lender

• Have you reviewed my documents, or is this based on what I told you?
• Has my credit been pulled?
• What conditions are left before final approval?
• How quickly can you update the letter for a specific offer amount?

That last one is practical. Many buyers prefer a letter written for the price of the offer they are making, rather than their maximum, so the seller does not see the full budget.

Keep it intact until closing

Once you are pre-approved, try not to change anything. Large new purchases on credit, opening new accounts, changing jobs, or moving large sums of money between accounts can all trigger questions late in the process. If something has to change, tell your lender before it happens, not after.

Sir Ashley's take

Get pre-approved before you start touring seriously. It tells you what you can really afford, it keeps you from falling for a home outside your range, and it lets you move quickly when the right one comes along.

Does getting pre-approved hurt my credit?

A credit check is usually part of pre-approval. Ask your lender how they pull credit and how it may affect your score, especially if you plan to compare more than one lender.

How long does a pre-approval last?

It varies by lender. Ask when yours expires, and expect to update documents if your search runs longer than that.