If you have always thought that being pre-qualified and pre-approved are two terms having the same meaning, then you are not alone. Often used interchangeably by the unaware, pre-qualified and pre-approved are two completely different terms.
It is a common mistake many buyers make by believing that if they have pre-qualified for a loan, then it means they are pre-approved as well. This can not only lead to confusion, but also result in financial problems later on, when they are seeking loan or mortgage for a major purchase like buying a home or a car. So let’s clarify these one by one.
In simple terms, it means to be qualified for borrowing a particular amount and this happens before you have applied for mortgage. You share a few financial details with the lender and make him aware of your income, liabilities and assets. He then explains various options available and recommends the type of mortgage best suited for your needs. Depending on the mortgage option you select, he gives you a letter of pre-qualification stating that you can be possibly approved for said mortgage.
As the information is not verified yet, there is no assurance or guarantee involved. Being pre-qualified is a simple step that does not take much time and it can be done online as well.
Being pre-approved takes you closer to get your desired mortgage. It is a more detailed process where you are given approval considering your eligibility to get a particular mortgage or loan. In this step, the information you share with the lender about your income, liabilities and assets is verified and checked. Mortgage lender goes through your financial records, mainly credit report, and present current rating to assess your credit score and history, in order to determine your credit worthiness.
Once the documents have been thoroughly checked, the lender is able to give you a fair idea about the mortgage amount you have been approved for, besides the interest rate and other costs associated with the mortgage.
Getting pre-approved holds far more value and significance, than being pre-qualified. However both these steps are important to get a step closer to achieving your financial goals.