What’s the Difference Between Pre-Approval & Pre-Qualification?

The homebuying process often involves a lot of industry jargon and technical terms that can confuse you. But you can rely on  AAFMAA Mortgage Services LLC (AMS) to help decipher what you need to know and navigate your path to homeownership.

When you start exploring home financing, you will come across two terms: pre-qualification and pre-approval. What’s the difference between them? Is one better than the other? And how do they work?

To answer these questions, we’ll do a deep dive into both, the processes associated with them, and the benefits, so you’ll have all the information you need to make the best financial decision for buying a home.

What Is Pre-Qualification?

Pre-qualification serves as the first step in the borrowing process. At this stage, the lender evaluates a potential borrower’s financial situation to determine how much they may be eligible to borrow.  This is a quick and informal process that provides a general idea of loan options and amounts, but it is not a guarantee of loan approval. It helps borrowers understand their potential loan limits and prepare for the next steps in the application process. 

The lender or a financial advisor may ask you questions about previous homeownership, income, debts, and assets. Typically, there’s no hard credit check, so reviewing your credit status won’t affect your credit score. This conversation could happen over the phone or in person, and you’ll probably get an answer on pre-qualification the same day. 

Benefits of Pre-Qualification

Pre-qualification offers several benefits for prospective borrowers:

• It helps set realistic expectations of your borrowing power.
• It doesn’t impact your credit score.
• It allows you to explore different loan options early in the process. 
• It helps identify potential financial issues that may need to be addressed before moving forward with a formal loan application. 

What Is Pre-Approval?

Pre-approval for a loan is a more detailed and formal process than pre-qualification, where a lender thoroughly evaluates a borrower’s financial background, including income, assets, credit history, and employment status. 

This process typically involves a hard credit check and may require documentation such as tax returns, bank statements, and pay stubs. If the lender is satisfied with the borrower’s financial profile, they provide a pre-approval letter, which outlines the maximum loan amount and terms the borrower may qualify for. 

Unlike pre-qualification, getting pre-approval signals to sellers or agents that you are a serious candidate who has been vetted for creditworthiness. However, it is not a final loan commitment.

How Pre-Approval Works

Applying for a pre-approval is a more involved process than seeking a pre-qualification. Here are the typical steps involved in the pre-approval process for a loan:

1. Gather Financial Information: Collect the necessary financial documents, such as your tax returns, pay stubs, bank statements, proof of employment, and information about your debts and assets.
2. Submit Loan Application: Complete a formal loan application with a lender, providing detailed information about your financial situation.
3. Credit Check: The lender will perform a hard credit inquiry to assess your credit score and history, which may temporarily affect your credit score.
4. Lender Review: The lender will review your submitted documents and credit report to evaluate your financial stability and ability to repay the loan.
5. Pre-Approval Decision: If the lender is satisfied with your financial profile, they will issue a pre-approval letter. This letter specifies the loan amount you qualify for and may include estimated loan terms.
6. Receive Pre-Approval Letter: Use your pre-approval letter to demonstrate to sellers or agents that you’re a serious and qualified buyer.

The Importance of Pre-Approval for Military Families

Pre-approval is especially important and beneficial for military families, who often face unique financial and logistical challenges due to frequent relocations and deployments. It streamlines the homebuying process, giving you peace of mind and a stronger negotiating position.

Obtaining pre-approval for a loan offers several advantages:

• It clarifies how much your family can afford to borrow, helping you focus on homes or properties within your budget and preventing unnecessary stress during an already busy move. 
• The pre-approval letter signals to sellers that you’re a serious and financially qualified buyer, which can be especially important in competitive housing markets.
• Pre-approval allows military families to take advantage of VA Loans, which offer benefits such as no down payment and favorable interest rates. 
• With the certainty of pre-approval, military families can act quickly in situations where time is of the essence, such as when you need to secure housing before an impending transfer or deployment. 

Which Is Right for You?

Deciding between pre-qualification and pre-approval depends on where you are in the homebuying or loan process and your financial readiness. If you’re just starting to explore your options and want a general idea of how much you might be able to borrow, pre-qualification is a quick and easy way to get an estimate without committing to a detailed financial review. 

However, if you’re ready to start making serious offers or need to secure financing soon, pre-approval is the better choice. It provides a more accurate loan amount and shows sellers or lenders that you have been thoroughly vetted and are financially prepared. 

Pre-approval is often essential in competitive markets where a stronger buying position can make a difference. Ultimately, if you want more certainty and credibility with lenders or sellers, pre-approval is the way to go.

AAFMAA Is Here to Help

Whether you’re thinking about buying a home, ready to start home-shopping in earnest, or considering a refinance, an AMS Military Mortgage Advisor, a licensed mortgage loan originator, can provide you with an honest and fair comparison of your mortgage options, including a wide range of affordable mortgages designed to meet your needs.

Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Reach out today to get your free mortgage assessment.

This article was originally published July 9, 2019.