Pre-qualified vs pre-approved: what's the difference?

What's the difference between pre-qualified and pre-approved?

Both are letters saying a lender is generally willing to lend up to a certain amount; the difference is how much the lender has checked. A pre-qualification is usually based on what you tell the lender. A pre-approval usually follows a credit check and verified documents. Lenders use the words differently, and neither is a promise to lend.

Either letter rests on certain assumptions. The Consumer Financial Protection Bureau (opens in a new tab) points out that lenders don't use the two words the same way, so the label alone tells you little.

So when you compare letters, ask the lender one plain question: what did you actually verify? That answer is worth more than the word at the top of the page.

Is a pre-approval a promise to lend?

No. A pre-approval is not a loan offer. Final approval depends on the home you choose and on nothing important changing in the meantime. A low appraisal, a property the loan program won't accept, a change in income, or new debt can change the picture. A later commitment letter is firmer but still has conditions.

The things that most often change the picture:

• The appraisal comes in below the price you agreed.
• The property itself doesn't qualify — for example a condo project the loan program won't accept.
• Your income changes: a new job, a gap, or a switch to self-employment.
• New debt: a car loan or new credit card before closing.
• Something new shows up on title or in the documents.

Some lenders can also issue a written commitment letter later in the process. It is firmer, but it still carries conditions and an end date.

Will getting pre-approved hurt my credit?

Usually only a little. CFPB says that when several mortgage lenders check your credit within 45 days, the credit reports record it as a single inquiry, and the effect on most scores is small. So comparing two or three lenders is fine. Opening new credit cards or loans while you shop is what to avoid.

Even after that window, CFPB says (opens in a new tab) shopping is usually still worth it. A pre-approval early on also shows you any credit problems while there is still time to deal with them.

What do you need to get pre-approved?

Most lenders ask for roughly the same things: photo ID and permission to pull your credit, recent pay stubs and W-2s, bank and retirement statements, and a list of your monthly debts. Self-employed or commission income usually means tax returns too. If you served, your Certificate of Eligibility is also needed, and the lender can usually request it.

The full list:

• Photo ID and permission to pull your credit.
• Recent pay stubs and your W-2s.
• Tax returns, if you're self-employed or have rental or commission income — see self-employed loans.
• Recent bank and retirement statements, for your down payment and reserves.
• A list of your monthly debts: car, student loans, cards, child support.
• If you served: your Certificate of Eligibility, which the lender can usually request for you — see VA home loans.

Not sure where you stand yet? The readiness check takes two minutes and asks for no name or documents.

When should you get pre-approved?

Before you start seriously looking, so you know your range and can make an offer when you find the right place. Letters carry an end date, so ask how long yours is good for. A pre-approval is not a Loan Estimate; once you apply for a specific loan, the lender sends a Loan Estimate to compare costs.

If your letter runs out, expect the lender to re-check things.

Once you apply for a specific loan, the lender must send you a Loan Estimate (opens in a new tab) within three business days. That is the document to compare costs on.