The world of mortgage lending can contain a great deal of terminology that can be challenging to interpret. It’s easier to see these terms in context of a loan pathway. When borrowers apply, lenders carefully evaluate the loan application—reviewing a set of specific financial indicators. In order for a loan to eventually be approved, your financial portfolio must match the lender’s requirements, which vary from lender to loan.

Because of this process, many borrowers seek out a preliminary status called ‘pre-qualified’ or ‘pre-approved.’ Although many people use these terms interchangeably, they actually mean two very different things. The problem is some buyers, and their buying agents, receive a false sense of hope about their borrowing capability, which at the very least leads to frustration but sometimes even worse outcomes.

For instance, buyers who believe they’re pre-approved, but are actually pre-qualified, could end up losing their earnest money should their loan fail. Buyers who’ve recently sold a home or finished up a lease may find themselves suddenly searching for a place to live because their loan did not go through.

But it doesn’t have to be that way. Understand the difference between these two lending terms and if you’re looking to buy, make sure you know where you stand.

Mortgage Pre-Qualification

The best way to think about pre-qualification is that it's the first benchmark toward buying a home. Most pre-qualifications can be done very quickly online or over the phone, and the whole process can take only a few days to complete.

Since the financial information provided is limited and no extensive credit check is done, loan amounts or rates are usually not finalized by the lender until pre-approval. It's important to note that receiving a pre-qualification letter does not necessarily mean the mortgage loan has been approved. That’s because the buyer’s application has not been through an initial underwriting stage. In other words, it hasn’t been vetted for potential problems that could cause the loan to fail.

Mortgage Pre-Approval

Lenders need to gather more in-depth information about employment, income, credit history, and more to create a more accurate picture of your mortgage eligibility. You can learn exactly what lenders are looking for in this article. There are some factors like employment that can slow down the borrowing process, so it’s really important that buyers understand their borrowing capability based on their most current financial picture—not where they were last year or even six months ago. The good news is that an experienced loan officer can help hopeful buyers get their financial portfolio in shape. And once buyers, and their realtors, understand how long this process may take they can adjust their home search accordingly

When a lender does pre-approve a mortgage, this means a loan offer can be made. This offer will contain a more accurate summary of how much can be borrowed and how much the payments will be. At this point, many lenders may ask borrowers to lock in their interest rate and ask that a mortgage application be signed.

With pre-approval secured, you will know exactly what your budget looks like and you'll be a step ahead of others who are looking for a home. In fact, pre-approval letters can be a way to leverage your offer because of the security it provides sellers and their agents. For example, if a seller is comparing two buyers and one is pre-qualified and the other has a pre-approval letter they can base their decision on more than a financial offer. For contingent buyers looking for an edge in a hot market, getting a pre-approval letter is especially important.

Because your loan will go through a final stage of underwriting, a pre-approval letter is not a guarantee that you won’t have any bumps along the path to closing. However, an experienced loan officer should already be aware of any challenges your loan may face in the final stages and have a strategy in place. One of the ways loan officers do this is by providing their underwriting department with a fuller financial picture when it comes to your loan. Adding this context accounts for questions underwriting may have about your loan application when looking at data points such as job changes within the same industry or income averages for non-salaried earnings.

Questions to Ask Your Lender

Get with your lender to help guide you through the home buying journey. The gray areas between pre-qualification and pre-approval can be confusing at first, so it's a good idea to discuss any concerns you may have early on. Here a few questions you may want to bring up.

• How do I know if I am pre-qualified or pre-approved?

• What can I do to expedite the pre-approval process?

• What must I do—or not do—during this stage to avoid losing my pre-approval status?

• Will the terms of my mortgage change after I've been pre-approved?

Our Takeaways

At Mortgage Zen, we advise all buyers to go through the pre-approval process to ensure they know exactly how much they can borrow, their potential mortgage payments, interest rate options, and costs associated with borrowing. Additionally, we look for any problems in their loan application in advance of making a home offer, which makes the loan experience much smoother overall. We’ve found that this transparent process helps keep the focus on the excitement of finding the right home rather than on the stress of your loan application.