Pre-approved vs. Pre-qualified

Pre-approved
Pre-qualified

Pre-qualification for a loan is a statement from a financial institution that provides a non-binding and approximate estimate of the amount a person is eligible to borrow. It is based on self-reported income, assets and liabilities and does not require the borrower to furnish any documentation or evidence. On the other hand, pre-approval for a loan is a more involved process. It is the first step of the loan application. The amount that a person can borrow is based on extensive verification of the person’s financial background and current credit rating. The borrower has to submit the relevant documents to support the facts.

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Pre-approved

Pre-qualified

Process Formal Informal
Cost There is usually an application fee but it may be charged later when the loan closes. Free
Documents required Documents required to support financial background and credit worthiness e.g. income statements, tax returns, bank statements, pay stubs, W-2 forms. Typically none.
Interest rate In some cases, the interest rate can be locked-in at a specific rate. Not specified.
Time to obtain loan After pre-approval, it usually takes only 2 to 3 weeks for the loan to close, unless the loan amount is higher than the pre-approved figure. Even after pre-qualifying, it takes 30-45 days to close a loan.

Contents: Pre-approved vs Pre-qualified

edit Process to become pre-approved or pre-qualified

Pre-approval for a loan takes a lot longer because the process requires the borrower's credit report to be pulled and for her to submit evidence of income and assets.

edit Process of pre-qualification

Loan pre-qualification can be done over the phone or the Internet and usually does not require any documents. Since it does not include an analysis of the credit report or verification of income, the pre-qualified amount is an approximate amount. During this step, a lender lists various mortgage options and recommends the options that suit the borrower’s situation. Pre-qualification lets a borrower get a rough idea of her assets and liabilities to find out the affordable mortgage amount. Being pre-qualified does not speed up the actual process of obtaining the loan.

edit Process of pre-approval

Pre-approval requires filling of a loan application form and sending it for underwriting. The borrower receives a written commitment for a certain amount. This commitment is not unconditional; it is contingent upon the bank’s (or lender's) approval of the appraisal of the home and the purchase price not exceeding the market price.

Being pre-approved completes a significant portion of the loan process. Once the loan has been pre-approved, the property is appraised by a 3rd party appraiser. Finally, the mortgage application is sent to the underwriters for a final approval. The time from pre-approval to the loan closing is usually only two to three weeks.

In this video, David Worley, a loan officer, explains the benefits of pre-qualification and pre-approval:

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