Pre-Qualification VS. Pre-Approval & Why it Matters

Buyers sometimes hear these terms interchangeably, but there’s a very big difference between the two. For Sellers receiving similar offers, the difference could very well push you over the edge of having yours accepted!

The How

When a buyer fills out an application for a loan with any lender, they are asked basic questions about their income and expenditures. This information provides an idea of what your debt to income ratio looks like. Assuming you have a livable annual income with low expenses, you may be awarded a Pre-Qualification Letter from a loan officer. 

This document will be sent to a seller along with your offer. The issue with a Pre-Qualification is that it’s not the full picture of your finances. There are documents a lender needs in order to determine your true financial means such as:

1. Past 3 years of Tax Returns

2. Past 3 months of Pay Stubs or Income Statements

3. Past 3 months of Bank Statements

Once those are analyzed, there are factors that could cause a loan to fall through such as:

1. Owning your own business less than 2 years

2. Income received from 1099’s instead of W-2s

3. Credit history that shows consistently missed payments on a home, vehicle, credit card

Can you get an offer on a home accepted with a Pre-Qualification Letter? Yes! It happens all the time. However, you as the Buyer risk losing due diligence funds offered and/or inspection payments made if the lender decides your finances are too much of a risk to award a loan.

The Seller accepting your offer also is at risk! If your loan falls through then they have to put their home back on the market which can be detrimental to future sales; even though they were not at fault for having to return to the market!

The Power of the Pre-Approval Letter

A Pre-Approval Letter is a safer option for both parties!

The Buyer now has a more solid comfort level that they’ll be able to receive the loan, and can focus on issues like home inspections, the appraisal, and requirements for closing on the home.

The Seller in this case knows the lender has reviewed appropriate documents and assessed that the buyer has the means to purchase their home.

The Bottom Line

If the Seller receives two of the same offers on their property, yet one Buyer has a Pre-Qualification Letter, and the other has a Pre-Approval letter... 9 times out of 10 the Pre-Approved Buyer will win the day!

P.S. Things like the type of loan you're using (FHA, VA, USDA, or Conventional), or who the lender is have powerful sway as well. Ask a Lender or Realtor for more information!