Pre-qualification vs. pre-approval

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Two terms often used early in the mortgage process are pre-approval and pre-qualification. Though they sound similar, each is very different, and it's important to know the differences between them.

Pre-qualification is a quick way to get a basic idea of eligibility for a new mortgage. You give the lender a basic summary of your financial situation, including income, assets, debts, liens. After they evaluate your information, they provide you with an "unofficial" estimate of how much you can borrow. Because a lender pre-qualification does not use detailed personal financial information, it is not as strong as a pre-approval.

Pre-approval (recommended) is an official approval from a lender for the amount you can borrow for a mortgage. Expect a credit check and more in-depth review of your creditworthiness. The lender (or bank) verifies your personal financial details using your mortgage application, FICO score and credit reports, income statements, employment verification, etc…

Be prepared to provide details on:

Employment history or verification of employment

This will typically include the name, phone, and address of your current employer. You will also need to identify your history with the company, your current position, and salary including overtime, bonuses, commissions, and at least two pay stubs.

Proof of income

Providing proof of your income is essential for the lender to know how you will pay the mortgage. Expect to supply two years of W-2s, profit & loss statements (if self-employed), and supplemental income like pensions, social security benefits, public assistance, child support, and alimony.

Personal assets

Assets identify collateral used to secure the underwriting of your loan. This may include three months of bank statements (savings, checking, brokerage accounts), other real property, investments (stocks, bonds, retirement accounts), proceeds from the sale of your current home, and monetary gifts from relatives.

Current debts

This will include your current mortgage loan, liens, alimony or child support payments, divorce decrees, car loans, credit cards, other real estate property, history of bankruptcies, collections, foreclosures, and delinquencies.

From here, your lender provides an "official" pre-approval letter stating the maximum loan amount you are approved to borrow for your new home. This letter, and the amount you're pre-approved for, is generally good for 60-90 days.