Mortgage Basics: Prequalification or Pre-Approval – What Do I Need? [Video]

My Home May 04, 2017

So you’re at the point in your life when you’re thinking about buying a house, but you’re not quite sure how much house you can afford — or if you need proof of that amount before talking to real estate agent.

Is it important to get pre-qualified or pre-approved by a lender before you start looking? What’s the difference between the two? And how might such documentation help you in your search? Here’s a handy reference. 

Getting pre-qualified
Mortgage pre-qualification is not a commitment to borrow, nor is it a commitment by the bank to lend you money. It's merely a lender’s pre-assessment of whether your debt-to-income ratio fits within its guidelines for home loans, and how much you might be able to borrow should you wish to start house hunting. It can be as simple as filling out an online application or sitting down with a loan officer and checking your credit. You may ask your lender for an official letter. Such documentation not only informs you of your own buying capacity but also indicates to real estate agents you’re a serious home buyer, not a hobbyist out looking for property-viewing entertainment.

Pre-qualification may be based off your credit score. It may also take into consideration your other expenses and how they're affecting your budget and existing bills, which may highly impact both your ability to borrow and the terms of your loan. 

Getting pre-approved
mortgage pre-approval is much more official than a pre-qualification; in fact, it involves going through the same steps with your lender as an actual mortgage application. While a pre-qualification can be done anytime, a pre-approval from a lender only lasts a given amount of time (usually around 90 days). Additionally, it requires an inquiry on your credit, meaning you don’t want to repeat it too many times.

A pre-approval requires you to provide detailed documentation of your income and assets to be reviewed by the underwriters. If you’re pre-approved, you'll get a conditional commitment from the lender for a specific loan amount. The major difference between a pre-approval and a loan approval is that a pre-approval doesn't have to be linked to any specific property and is only about evaluating your ability to repay the loan. 

The pre-approval document shows you have the resources to make a purchase, allowing you to move quickly if you find the home you want to buy. Sellers often look more favorably on buyers who are pre-approved, and having that status may give you better negotiating power in the event of multiple bids on the house you like.  

The following documents are needed for a pre-approval: proof of the last two months of income and taxes over the past two years, your two-year residence history, your personal assets including bank account statements and proof of current real estate holdings, divorce decrees, bankruptcy discharge papers, and other information related to your other personal debt, including car and student loans and credit cards.  Ask your lender for all document requirements to be pre-approved.

Visit U.S. Bank online for more answers about home mortgages, or watch the other videos in this series: 

Mortgage basics: 3 key steps in the home buying process
Mortgage basics: Finding the right home loan for you
Mortgage basics: What do these interest rates mean?