Mortgage Pre-Qualification vs. Pre-Approval - Understanding the Difference

A house is a dream asset for many people. Andrew Carnegie, one of the wealthiest Americans in history, said, “Ninety percent of all millionaires become so through owning real estate.” Understandably, most people who are looking to own a home are not doing so to become millionaires, but to seek financial independence in their own way. Owning a house or any other type of real estate is a crucial step in that direction. That is why Cher can help you realize this dream with various services to streamline the co-ownership process.

When purchasing real estate, one will come across the terminologies pre-qualified and pre-approved. Here is a quick definition and our guide to their critical differences.

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Pre-qualification is the informal part of the process of house buying, where one gives the lender the information they need to see if the individual is a financial fit for the house they want. The pre-qualification process is typically verbal, and it is considered a pre-test with the lender along with sharing information on an informal basis. During this process, one is not required to verify their financial claims, although specific questions will come up to prepare the borrower for the more formal pre-approval process.


A man fills out documents for mortgage qualification.

This is the formal process of verifying if the borrower qualifies for the loan that they need. This means investigating any financial claims made, checking credit scores, and checking for any red flags in the borrower’s history, including jail time and financial disputes.

Pre-qualification is an excellent idea for people shopping for a house but not ready to make any commitments. It enables one to see what the process entails and anticipations that awaits them during the pre-approval endeavor.

Industry experts recommend that people who are ready to buy should skip the pre-qualification process and go straight to pre-approval.

You can check out Cher for more financial advice and loan estimations.

What do I need for pre-qualification?

Pre-qualification means the lenders have determined that the borrower is the right candidate for the loan. After this, they will conduct a soft inquiry of the borrower’s credit report. For this process, they will require the individual asking for the loan to answer questions truthfully that they will note down for their own records.

From the information the lender gathers during the pre-qualification process, they will let the borrower know if they have pre-qualified for the loan and how much they can expect to receive. The borrower can then decline or accept the amount offered. If they accept, they can move on to the pre-approval stage.

What is needed for pre-approval?

For pre-approval, one needs hard and soft copies of documentation to support their earlier claims that got them through the pre-qualification process.

Proof of Income

Anyone buying a house needs to provide a W-2 form, which is also known as the Wage and Tax statement. This form is usually sent by the employer to the IRS to report their employee’s annual wages and the taxes paid from their paycheck.

If the buyer is a W-2 employee, they need to produce this document to the lender as proof of income. They need this form for the past two years as well as recent payslips and also any additional income, including bonuses and alimony.

Finally, they need to provide proof of tax returns.

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Good credit

Lenders will investigate the credit score of the borrower. Mortgage lenders, in particular, prefer to work with the FICO 8 credit score formula because it offers better risk assessment for the lender. A good credit score range for the borrower is between 740 and 799, as this is above the national average borrower’s range. For scores within this range, an individual is likely to get their loan approved at lower interest rates. This credit score also says that the borrower is less likely to default on their payments.

However, if one can’t attain the above credit score, then the range between 670 and 739 will still allow them to get a conventional loan with higher interest rates. Anything lower than this means the borrower will have a difficult time accessing a loan.

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Proof of assets

Lenders like to see assets that the borrower can put down as collateral because this proves that if the borrower is unable to pay their loan, the bank can seize their physical assets to recover their money. Some lenders like to have the borrower purchase PMI (private mortgage insurance) if they are not putting down the entire 20% of the down payment.

If the borrower has a high debt-to-income ratio, it means that they don’t have assets to cover their loan and this can disqualify them for the pre-approval process. If an individual receives money from a friend or family member to help with payment of the house, they need a gift letter to prove the money is not categorized as a loan.

Employment documentation

Employees gather around a table to discuss business plans.

The borrower needs to show documentation, placing them in employment so that the lender is convinced of their financial stability. Self-employed individuals need to provide all the paperwork on their business, income, and taxes as proof of financial security.

Important tips to remember

The pre-qualification process should begin at the lender’s office, not during an open house. Even if the real estate agent broaches the subject, the potential customer should not get drawn down that rabbit hole. It’s too soon for that conversation, and the house should be viewed without any pre-conditions and undue pressure.

Borrowers must always keep in mind that lenders are only willing to offer loans to people with stable employment. This guarantees them that their money will be returned.

Shop around for lenders and research their services and terms while comparing their down payments. Remember that a lower down payment does not necessarily mean that this is a good thing. In fact, lenders with abnormally low down payment requirements can be a red flag. Instead, look at the reputation of the lender and online reviews from previous customers.

Property sellers expect buyers to come with a pre-approval letter before they can begin the sale process. They are more willing to negotiate with buyers who have financial proof of stability.

you can check out Cher for assistance to help you become a homeowner.


Two home co-owners discover their mortgage has been approved.

Pre-qualification and Pre-approval may sound similar, but they are very different. Pre-qualified is an informal interview to check your financial status. Pre-approve is more formal and requires official documents. These documents will determine if you are approved for the loans or not. It can be an overwhelming process, but luckily, Cher can provide consultations and additional services to help you sail through this stage in life. That way, you can turn your dream of becoming a homeowner into reality.Related: Know More About Cher