What is mortgage pre-approval?

Mortgage pre-approval is an evaluation conducted by a lender to determine how much money they are willing to lend you for buying a home. During this process, you provide the lender with your financial information, including income, assets, debts, and credit history. The lender reviews these details and assesses your creditworthiness and ability to repay the home loan. Based on their evaluation, they provide you with a pre-approval letter, stating the loan amount you are eligible for.

Pre-approval vs. pre-qualification

It’s important to distinguish between pre-approval and pre-qualification, as these terms are often used interchangeably but have different meanings. Pre-qualification is an initial assessment of your financial situation based on self-reported information provided by you. It gives you a rough estimate of how much you might be able to borrow. On the other hand, pre-approval is a more comprehensive evaluation, where the lender verifies the information you provide and assesses your creditworthiness in detail. Pre-approval holds more weight and is a stronger indication of your eligibility for a mortgage.

“Get pre-approved than pre-qualified that way you know the lender has reviewed all of your information, such as income, credit, and debit ratios. That way you and your agent know exactly how much you can afford,” recommends Diane Merril from Diane Merrill Loan Consulting.

Pre-qualification letter: A pre-qualification is an estimate of the amount of home loan you can get. It’s based on an informal evaluation of your income and other information.

Pre-approval letter: A pre-approval is an official document from a lender that tells you exactly how much loan money you can get based on your financial information, such as W-2s, bank statements, and your credit score. You’ll experience fewer surprises when you’re pre-approved, as you’re less likely to run into last-minute surprises or delays with your mortgage lender.

The bottom line? Request a pre-approval before you start shopping for a home.”

Pre-approval vs. approval

While pre-approval is an important step in the home-buying process, it should not be confused with final approval. Pre-approval is a preliminary assessment that helps you understand your budget and strengthens your position as a buyer. However, it is not a guarantee that the lender will approve your mortgage application once you find a specific property. Final approval is granted after a thorough evaluation of the property you intend to purchase, an appraisal, and other necessary checks.