Difference Between Pre-Qualification and Pre-Approval

More than just a terminology difference, preapproval and prequalification represent different stages in the homebuying process.

Prequalification is an unofficial "guesstimate" from a loan officer of how you can afford to pay for a house. The loan officer determines your eligibility based on the verbal or written details you provide about your income, credit history, and finances. Your credit report usually isn't pulled in this process. Based on the figures you provide, the loan officer calculates your debt-to-income ratio and writes you a letter of prequalification stating how much you should be able to borrow.

This service is usually offered for free. As a vague, unscientific process (you can receive prequalification with as little as a phone call), prequalification doesn't hold much weight with lenders or sellers. It is, however, a good first step for those just starting out, looking to gauge what sort of price bracket they might be able to afford.

Pre-approval is a more involved step. Obtaining a pre-approval letter means sitting down with a lender and supplying documents such as your tax returns, income stubs and bank statements, and getting your credit pulled. Lenders analyze your entire financial picture to determine whether they offer a loan product to fit your needs, what type of risk they might take on, and whether the information in your application is accurate.

If you're approved, you'll receive a pre-approval letter, certifying that you have the resources to afford a home for the approved amount, usually stating the interest rate as well. Sellers and their agents appreciate dealing with pre-approved buyers, as it shows they are serious about buying a home, and have the resources to make it happen. Buyer agents love working with pre-approved clients as well, for the same reasons.