What is the Difference Between Mortgage Pre-qualification and Pre-approval?

A guest author just wrote an article on benefits of getting pre-approved before purchasing a home getting pre-approved before buying a home. It really isn't just an idea or suggestion, most sellers will not accept an offer without at least a pre-qualification letter. If a seller doesn't understand the importance of this, the listing agent will educate them.

How it used to be done

When I first started selling real estate in 1983 there were no pre-qualification expectations. We would go through an entire loan process, waiting on pins and needles to see if the buyers would get approved for the mortgage. In many cases, they didn't.

In fact, we did our own pre-qualification process. We would just ask the buyers questions about their job history, their gross income, and any expenses they had. Then we did a simple calculation to see if they were in the ballpark to qualify for a mortgage. It was very rudimentary and if things came up that the buyer didn't tell us (which can still happen now, but at least it usually gets caught at the beginning of the process), we found out at a much later date. That could take 30 days or longer (usually longer back then). I always thought the mortgage application without any kind of upfront pre-qualification being done, or the very simple ones that were done back then, was backward. And back then there were no credit checks being done.

Once computers became more popular, the process was handed over to loan officers and qualifications were quickly done, were written on the lender's stationery and were a bit more thorough. However, a pre-qualification is not the same as a pre-approval. Both terms have been mixed up over the years.

Why a seller and their agent require a pre-qualification

When sellers accept an offer, their MLS listing is now shown as pending or "offer accepted but accepting back-ups". For the most part, their home is off the market for other buyers. So it is never fun for a seller to wait a month or more only to find out that the buyers do not qualify to purchase their home. Then they have to start over from scratch to find a new buyer and, as was the case in 2023, the market can change very quickly.

Many buyers were pushed out of the market completely when interest rates jumped. They went from qualifying for a first-time home to only being able to afford a condo. If those buyers did not want condo living, they just remained where they were in the hopes the interest rates would go down. Most are still waiting and are no longer looking at homes for sale.

In a case like this, many sellers in the shifting market saw fewer buyers competing, lower offers, and for a large number of sellers, their homes sat on the market longer. Now sellers are offering rate buydowns to buyers, are reducing their list prices, and are offering other buyer concessions. They are much more willing to make repairs that come from home inspections. During the Seller's Market, buyers weren't even having inspections done, let alone getting sellers to repair anything.

All of this means that sellers can lose a lot of money if a so-called pre-qualified buyer wasn't that qualified after all. As a buyer, would you want to be dreaming and planning on living in this home you fell in love with, only to be told that you can't get it? It's bad for both buyers and sellers when a mortgage loan is not approved and doesn't make it to the closing table.

Pre-approval and pre-qualification are two different steps in the mortgage loan process

Pre-qualification is a preliminary estimate of how much mortgage a person can afford. It's based on self-reported income and expenses, and doesn't guarantee loan approval. It's a simple, informal process that gives borrowers an idea of what they can afford. This is what most buyers provide to a seller and listing agent. It is based on what the buyer tells the loan officer, although a credit check is usually done at this point, which wasn't the case in the past.

Pre-approval, on the other hand, is a more formal and in-depth process. It requires a lender to verify a borrower's financial information, including their credit score, income, and debt. Based on this information, the lender will give the borrower a written commitment for a mortgage loan, up to a certain amount. This commitment is subject to a property appraisal and a successful review of the title report. Pre-approval is a stronger indication that a borrower will be approved for a loan and can be useful in negotiations when making an offer on a property.

A pre-approval is almost as good as cash. The only difference is that with financing there is always an appraisal done to assure the lender that the property is worth what the accepted contract states.

Even though there are fewer multiple offers today than in the robust (and crazy) Seller's Market, the nicest homes in their price ranges can still have bidding wars. A cash purchaser is usually the best bet (as long as the price and other details of the offer are acceptable to the seller). But if there isn't a reasonable cash offer, then being fully approved with the contingency of an appraisal is the next best thing.

When we sold our past home, which was in the beginning of the Seller's Market, we had 18 offers. Five of those 18 were at the same top price. Only one of those buyers was fully approved. The others were just pre-qualified. We did have a couple of cash offers but they couldn't go as high as these 5 offers.

Which one would you have chosen? Our only hurdle was getting it appraised because it was a high price compared to current comparable listings that had recently sold. Lucky for us, it appraised. And it closed, which we knew it would because the buyers were already approved for the loan.

There is never a 100% guarantee that buyers will close on a home whether they have cash, are fully approved for a mortgage, or are just pre-qualified. I had cash buyers that broke up before they could close and they did not proceed. My sellers decided not to fight for the low earnest money that was provided (that my sellers accepted because of extenuating circumstances) and they elected to put their house back on the market and move forward. We found another buyer and even though they were not cash buyers, they were approved and closed on the home.

In summary, pre-qualification is a less rigorous process, while pre-approval is a more formal and in-depth process that provides a stronger indication of loan approval. A pre-approval gives the seller a higher level of confidence that they'll be going to the closing table with these buyers.

I never ask my clients, whether buyers or sellers, to do something I wouldn't do. That is why we always got fully approved before making an offer if we were getting a mortgage. We want to be as competitive as possible in case we are up against other offers, including all-cash offers.