Pre-qualification vs. pre-approval: what homebuyers need to know

For most people who start their search to buy real estate, the first step in the process is figuring out what type of properties will fall within their financial budget. And unless a buyer intends to cover the whole purchase with cash, taking a mortgage will be a part of their plans. Though having a rough estimate of the properties a buyer can afford will help streamline the process, it’s not always so clear how much money they will be able to borrow from a lender.

Fortunately, most lenders offer a pre-qualification process. Completing this process will not only help buyers understand if they will be eligible for a loan — and if so, for how much — but it can also help them streamline the process once in discussions with agents and sellers.

What is a mortgage prequalification?

A mortgage pre-qualification is an early step in obtaining financing from a lender. A pre-qualification is a process ​​in which a lender estimates how much a person may be able to borrow for a mortgage based on their current financial situation. It can be a helpful tool for those who are looking to purchase a property — either a residence or an investment property — and want to make sure that they are looking at houses that are within their price range based on the mortgage for which they’ll be able to secure. Whether a borrower is looking immediately to purchase a property or planning to wait 6-12 months before looking, a pre-qualification can be useful as it provides valuable insights into the types of properties one might be able to afford.

Many real estate agents and sellers are weary of deals falling through at the last minute because of either a lack of funds or an inability to secure a mortgage, so a potential buyer who is pre-qualified can be reassuring for them. A pre-qualification usually comes with a “pre-qualification letter.” This letter can be helpful as it may help an offer be taken more seriously, as it shows agents and sellers that a potential buyer has been working with a mortgage lender and is likely able to secure financing to afford buying the property.

It is important to note that a pre-qualification is not a pre-approval, and so it is not a guarantee of a mortgage or loan approval.

How does a pre-qualification work?

A pre-qualification is a preliminary step in the mortgage process that helps a borrower understand what they can afford and helps lenders determine whether or not an individual will be a good candidate for a loan, and as such. Since it doesn’t require a credit check or financial records, it’s more reliant upon self-reported information.

Although every lender might request slightly different information for a pre-qualification, an individual will typically need to provide the following information when applying for a pre-qualification:

Personal information: This might include your name, current address, and phone number

Financial information: This might include your credit score, annual income, a rough estimate of assets you own, and the liquid nature of your assets

Property Information: This might include the property location, the property use (i.e. residence or investment), and property type (i.e. single family, multifamily, condo, etc.)

Employment information: This might include your current employer, job title, and salary

At Milo, we don’t require employment information for a pre-qualification letter. Once you have provided this information to your lender, they will use it to determine a general idea of how much you may be able to borrow and what your monthly mortgage payments might be. Although your information doesn’t get verified during the pre-qualification process, it’s important that a loan candidate be as accurate as possible about all their information, as providing incorrect information might give them an imprecise estimate of the loan rates and terms for which they might be eligible, which in turn might delay the home purchasing process. Providing imprecise information can also result in a lender denying the extension of credit to a consumer due to a change in which loan programs a borrower is eligible for.

The benefits of a pre-qualification

There are several benefits to receiving a pre-qualification. As mentioned above, it can provide an individual with a rough estimate of how much they will be eligible to borrow, which can help them narrow down their search to homes that will fit within their budget. Additionally, having a pre-qualification letter can make you a more attractive buyer to sellers and agents, since it demonstrates that you’re already working with a lender and you have begun the process to secure financing and are serious about purchasing a home.

Though a pre-qualification doesn’t guarantee a mortgage of a certain amount, or even a mortgage for that matter, completing this process can speed up the mortgage application process when the time is right, as the lender will already have some of the necessary information to complete your application.

With Milo, the best part is that completing a pre-qualification application can take less than 5 minutes.

What is the difference between a pre-qualification and a pre-approval?

Two stages in the mortgage application process that are commonly mixed together are the pre-qualification and pre-approval steps. Though they both help an individual determine how much money they might be able to borrow, there are some key differences between these two stages.

For starters, usually the pre-approval stage comes after an individual has pre-qualified. A pre-qualification is a preliminary evaluation of your worthiness and ability to afford a loan based on financial information — such as income, assets, and credit — that a borrower has self-reported to the lender. It generally will provide a rough estimate of how much money a lender might be willing to loan, but it doesn’t guarantee anything.

A pre-approval, on the other hand, is a more thorough evaluation of your financial situation. Unlike a pre-qualification, a pre-approval often requires a credit check as well as a verification of income and assets by the lender. Though a pre-approval letter also doesn’t guarantee a mortgage, it is viewed as a stronger indication of your ability to secure a mortgage based on its more stringent requirements.

Though a pre-approval holds a little more weight with sellers and agents, a pre-qualification can have the same intended effect but requires much less documentation and can be completed much quicker.

Pre-qualify with Milo

With Milo's user-friendly online platform, you can generate a pre-qualification letter in minutes, giving you the edge you need when shopping for your home, whether primary or secondary. But that's not all - Milo's advanced algorithms take into account crypto assets, making us the go-to lender for those with non-traditional forms of wealth. Plus, if you're a foreign national or have had difficulty with traditional lenders, Milo is here to help.

Generate your own pre-qualification letter with Milo today and take the first step towards owning your dream home.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.