As you embark on your homebuying journey, you'll encounter two terms that can seem interchangeable: pre-qualification and pre-approval. While they sound similar, understanding the differences between these statuses can make all the difference in your mortgage application process.

Pre-qualification and pre-approval provide lenders with an estimate of your borrowing capacity. They are valuable steps in the mortgage approval process, indicating your financial readiness and enhancing your credibility as a homebuyer. While pre-approval and pre-qualification sound similar, they serve very different purposes. At its simplest, a pre-qualification checks your financial readiness to make a home purchase, while a pre-approval is a commitment from a lender for a home loan.

Pre-Qualification
Pre-qualification is a preliminary estimate of how much you can borrow, based on information you provide to a lender. It's a quick, simple process that typically involves sharing your income, debt, and assets. Essentially, pre-qualification is an in-depth budget check to help you get real about how much you can afford to borrow. It is not a loan application, simply a financial health check-up. 

Pre-qualification can also give you a better idea of the home loan options available to you before you need to make a final decision. Since it is based solely on your self-reported information, it does not guarantee you a loan offer. On the other hand, it also won’t impact your credit because it does not require a “hard inquiry” that can potentially ding your credit score. 

When to Pre-Qualify
If you’re just getting started on your homebuying adventure, a pre-qualification is a great place to begin. It will give you some general guidelines as to your potential budget and can also show any potential sellers that you’re serious, giving you a foot in the door on your dream home. 

While pre-qualifying has several benefits, it’s not a vital step in the home buying process.  If you have a strong grasp of your current financial situation and how much you can reasonably expect to afford, it’s possible to skip Pre-qualification and go straight to pre-approval.

Pre-Approval
Pre-approval is a more comprehensive process that involves a formal application and thorough verification of your financial history. Your lender will request documentation of your financial status, such as pay stubs, tax returns, bank statements, and a credit report. 

By verifying your income, assets, and debts, pre-approval establishes a more precise borrowing limit, allowing you to zero in on the precise range of properties you are likely to be able to afford. It can also give you a head start in a competitive housing market because it shows you are a serious buyer. 

When to Pre-Approve
The pre-approval process is most useful for when you’re seriously looking at properties and ready to buy. While pre-approval requires more effort than pre-qualification, it demonstrates your financial commitment and readiness to buy a home. Most pre-approval letters are only good for a limited time, generally between 30 and 90 days, so keep this in mind as you shop. 

While both options are valuable steps in your search for a home, there are some important considerations to keep in mind: 

  • Neither pre-qualification nor pre-approval is a guarantee of a home loan. You will still need to go through the full mortgage approval process if your offer on a house is accepted. 
  • Be especially careful with your credit during the home buying process. If you fail to make timely payments on your credit cards or other loans during this time, your lender may not approve your mortgage.
  • If you have any major life changes coming up, for example, you’re hoping to change jobs or purchase a new vehicle in the near future, it’s a good idea to adjust your timing so they don’t overlap with your home purchase. 

Understanding the differences between pre-qualification and pre-approval empowers you to make informed decisions during the home buying process. Whether you choose to pre-qualify and pre-approve, or just go straight for pre-approval, you'll increase your chances of securing the mortgage you need to own the home you've always dreamed of.

At Iowa Trust, we are committed to making your home-buying journey as smooth as possible. That’s why we offer pre-approvals as a free service to our clients through our trusted secondary market lenders. Pre-approvals are valid for 120 days, giving you the flexibility to explore your options.

Let us help you take the next step! Contact us to discuss your mortgage needs or begin your online application process today.