Mortgage Pre-approval Vs. Pre-qualification: Which Should You Get in NYC?

Buying a home can be one of life's biggest financial transactions. But, let's be real: it's not easy. To secure a mortgage, you need to take two important steps: pre-qualification and pre-approval. Perhaps you're already familiar with these terms. However, many homebuyers mistakenly believe these two steps are interchangeable. There are, however, important differences you need to know.

In short, pre-qualification gives you an idea of what you might be able to borrow, while pre-approval tells you exactly how much you can borrow. To make sure you're fully informed, we break down those similarities and differences below. So, if you're currently on the hunt for a new home, read on to find out which step deserves the most attention.

Mortgage Pre-Approval Vs. Pre-Qualification

Getting pre-qualified with a lender can help you determine how much of a mortgage you can afford and if you might be a good candidate to qualify for a mortgage.

Pre-approval is a more involved process that should be visited once you are ready to search for a home and place an offer.

Pre-qualification does not require proof of income or any documentation, while the pre-approval process does, including a hard pull on your credit.

• The pre-approval process requires proof of ID, income, assets, and a credit check.
• Getting your pre-approval letter ahead of house hunting or making an offer ensures that you can make an offer on the house as soon as you find the right one.
• Pre-approval letters expire within 60-90 days, so if you don't find the right property in time, you will have to go back to your lender for a second letter.
• Pre-qualification is not as essential as pre-approval, but it is still beneficial for a first-time buyer.

What is Pre-Qualification for a Mortgage?

Pre-qualification is the initial step in a mortgage transaction designed to essentially determine your borrowing power.

The figure quoted by your lender will allow you to customize and tailor your search for a home that you can actually afford.

At this stage, you shouldn’t be going to open houses.

Rather, you should be concentrating on going to a lender’s office to start the home buyer’s process.

Pre-Qualification is an Easy Step in Your Journey to Find a Home

Pre-qualification is an easy step in the home buyer’s journey to purchase a house because you don’t have to do much.

The prequalification stage only asks for finances given to your lender verbally.

You only need to tell a lender your name, contact info, your income, and a general overview of all your debts and all your assets.

You can give a lowdown on your finances to a lender with one quick call, a simple email, or in person.

In most cases, the lender will quickly give you a prequalification on the spot.

Since informing the lender requires no physical proof, the lender only has to take your unverified information to determine how much you will likely be approved for.

While in verification, in most cases your lender won’t do a credit check, although, for some, a soft inquiry may be required.

A soft inquiry doesn’t affect your credit score. In fact, a soft inquiry or no credit check at all is a benefit of pre-qualification.

New or first-time buyers should know that getting pre-qualified doesn’t always mean they’ll be able to get approved for the mortgage.

Significantly, potential homeowners who are pre-qualified should then be cautious about the homes they’re looking at because the ballpark offer may change when you start the process of getting a mortgage in the pre-approval stage.

Significantly, your loan amount based on a pre-qualification is less accurate than a loan based on a preapproval.

This step is most beneficial to the buyer, rather than bearing significance to a seller or an offer.

Read on: What You Need to Know Before You Buy Property in New York

What is Pre-Approval?

Being pre-approved for a mortgage differs from a pre-qualification because this step requires physical proof of your finances.

Your lender will check your credit score.

The lender is looking for all the details or possible blemishes that affect or have affected your score.

In doing so, the lender will inform the buyer of the maximum amount of money the lender will allow you to borrow.

The Difference Between Pre-Qualification and Pre-Approval

The major difference between a pre-qualification and a pre-approval is that the former is less rigorous when determining your loan and the latter is not.

At this early stage, the lender will decide if you can move to the second step, pre-approval.

This is also the time when the lender has decided if you will likely be approved for a mortgage loan up to a certain amount.

Any borrower needs to be aware that while this vetting process can predetermine your ability to secure a loan, it does not guarantee that you will get a loan commitment from the lender, which is later determined by the underwriter.

The decision is based on your current financial situation, which means that you should be gathering your finances and making sure there are no surprises, such as unpaid hospital bills that you failed to make and are now in collections.

Why is Pre-Approval Necessary?

The pre-approval stage is very important because, in a competitive real estate market, many sellers will not look at your offer unless you have the letter in hand that states you’ve been pre-approved.

That’s because home sellers know that pre-qualification is easy to get and thus holds little weight.

But the doors open wide when you have been pre-approved.

With a pre-approval letter, you can show that a bank already sees you as a good borrowing candidate.

It communicates to a seller that you are serious about buying a home and the seller will then entertain your offer in earnest.

The pre-approval also proves you have credibility and you’ll likely buy the seller’s home.

Significantly, once homebuyers find out exactly how much they can spend, they can be more realistic on the price of the house they are interested in.

In other words, this is the time where the homebuyers can assess their comfort level and adjust accordingly on a house to take into consideration their pre-approval quote.

Note that the lender will most likely give you a loan that is far too much to spend on a dwelling.

In fact, some uneducated buyers will use the highest amount given, not taking into consideration fees and closing costs that all homeowners have to deal with once they purchase their dream home.

These include HVAC, pool maintenance, lawn maintenance, buying new furniture, and the maintenance of the house itself, as well as, and potential HOA fees.

All of these things and more may put potential homeowners above their comfort level.

What Happens in the Pre-Approval Stage?

Unlike pre-qualification, the lender will be looking for proof of finances in order to ascertain if you can carry a mortgage.

This means more than verifying your credit score.

The difference between being pre-qualified and pre-approved becomes more salient when you realize the former takes into consideration your financials by word alone while the latter looks at some documentation.

What Do You Need to Supply Your Lender to Get Pre-approved?

The following are the documentation and steps your lender requires in order to receive pre-approval.

Proof of Identification

Lenders need from potential buyers proof of identification.

This means giving the lender your driver’s license number, or a passport if you don’t have a license.

The lender will also need your social security number in order to pull your credit report.

Fact-Checking

The lender will fact check your financials to make sure you aren’t falsifying anything, and to ensure that you don’t have too much debt on hand, which will raise a red flag and which may result in the lender rejecting you from a loan or lowballing you with a high percentage rate.

And all of this is even before you start looking for a new home.

Proof of Income

Homebuyers must show W-2 wage statements from the last two years, any documentation that shows year-to-date income like pay stubs, federal tax returns from the last two years, and proof of miscellany income such as end-of-year work bonuses or alimony.

Proof of Assets

To prove that potential buyers have funds for the down payment and closing costs, lenders will also need to look at bank statements for a number of years, any investment account statements, and their debt-to-income ratio (DTI).

Credit Check

Here’s more detail on a credit check.

Lenders require homebuyers their FICO score to approve the mortgage loan.

The magic numbers are a score of 620 or higher for approval.

For those who’ve spent years paying their mortgage and bills on time and have great credit—a score of 760 or high—lenders usually offer such homebuyers with their lowest interest rates.

Just remember that the lower your score, the higher your interest rate.

Maintaining good credit always works in your favor. If your score is low, you may be required to make a down payment that is larger than what you had anticipated.

Employment Verification

To get pre-approved, a lender will be looking at how many years you’ve been at your job and, if it’s been temporary or kind of short, like one to two years, the lender will have no choice but to contact your previous employer.

The lender is looking for stability, so even if you do hold a job for a significant number of years, the lender will want to see your pay stubs and also call your current employer to verify your employment and your salary.

What Happens After Your Finances Have Been Verified?

After the lender finds that your finances are in order, the lender will be confident that you can make the down payment and that you are able to pay your monthly mortgage statement in comfort.

The lender then gives you the exact amount of what you can borrow.

Do Pre-approvals Expire?

A pre-approved loan can expire after 60 to 90 days, especially if your financial forecast changes.

If you lose your job or take on new debt like opening up many credit cards and then maxing them out, or if you have just had a baby, your lender in this situation also has the right to decrease your loan.

However, pre-approval is not the last step in securing a loan.

The lender may have granted it, but in most cases, he or she will likely want to approve the home first, as well as further vet your assets and debt.

Learn more: How to Put in a Purchase Offer for an Apartment in NYC

What’s the Best Time to Get a Mortgage Pre-approval?

Like pre-qualification, the best time to get mortgage preapproval is in the early stages of buying your home, the time before you embark on shopping for a home.

This is the Time to Look for a House

Once you have supplied your lender with all the information above and the lender doesn’t find any significant red flags in your finances, it is then that you will receive your pre-approval letter.

For potential homebuyers, this is the point where you get realistic and choose a home at a lower price point to take into consideration all your expenses.

Probably the Best Decision You’ll Make

The most important thing to know after getting pre-approved is that once you find your dream home, the process of buying it happens quickly.

If you make an offer on a home, you don't have to rush to a lender.

You already a pre-approval letter you can present with your offer to show the seller you're not just serious about buying, but that you also seriously can buy it.

Does It Take Long to Get a Mortgage Pre-approval?

If you come prepared and have organized your paperwork, as well as made copies of them for the benefit of the lender, then you probably can get a mortgage preapproval on the same day you visit your lender.

But for those who are deep in debt, have a low credit score, and have maxed out their credit cards, the approval will be delayed.

By how much? It can take from a few days to several months.

Which is Better? Pre-approval or Pre-qualification?

Both pre-approval and pre-qualification are worth it.

A pre-qualification, based on the information you’ve given to your lender, is a verbal process, a representation of your finances that doesn’t require documentation.

While not mandatory, it's a good idea not to avoid this step.

In the early stage of your house hunting, a pre-qualification can give you an indication of what you will likely qualify for.

Just note that the pre-qualification doesn't hold the same clout as far as real estate agents or sellers are concerned.

But it can be a great tool when searching for a home, as it allows you time to compare and contrast other homes or other areas and neighborhoods as well as allow you to eliminate homes you may be interested in that are beyond the estimated figure that your lender has provided to you.

Meanwhile, a mortgage pre-approval is a step you can’t avoid as well.

While pre-qualification doesn’t require documents to back up your financial claims, in this step a rigorous review of your finances with proof will decide how much of a loan the mortgage lender will feel comfortable giving you.

Now that your finances have been backed up by real, hard data, your lender will then approve your loan and it will be accepted as confirmation that creditors will fund your loan and communicate to the seller and your broker that you can afford the home you’re looking at.

A pre-qualification gives you an estimate of what you can borrow and what you can afford, and a preapproval takes it one step further by telling you what you can actually borrow.

Still, both give you the same information.

They tell you early on in your home search how much you can afford, saving you time from finding your dream house only to find out that it is way out of your price range.

Choosing Between a Pre-Qualification and a Pre-Approval

If you have to choose between pre-qualification and pre-approval, you should go with the latter.

The pre-approval stage signifies to sellers and brokers that you are definitely interested in the seller’s property and that you have the funds to make a serious offer.

After pre-approval, the final steps that take you to the closing involve having the buyer’s potential home appraised by the lender.

Final loan approval occurs after the appraisal and the loan is applied to a property.