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.
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. If the borrower has a fraud alert or credit security freeze on their credit report, it can take longer; the security freeze must be lifted for credit to be pulled and the lender needs to take additional steps to verify the borrower's identity if a fraud alert is on the account.
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.
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:
- Borrowers can choose to take a loan lower than the mortgage amount they are approved for. But trying to borrow an amount greater than the pre-approved figure would require them to go through the approval process all over again. So borrowers should keep that in mind and apply for a reasonably large amount the first time.
- Pre-approval or pre-qualification do not guarantee that mortgage will be issued for the property. If the property does not meet the required conditions, the bank may not issue the loan.