How are pre-qualification and pre-approval letters different?

While they might sound similar, there’s actually a significant difference between a mortgage pre-qualification letter and mortgage pre-approval letter.

Before we get into how they differ, it is important to learn the term debt-to-income ratio. Your debt-to-income ratio is the percentage of your monthly income that goes to paying your existing debts, including mortgage, other loans, credit cards, & child support, etc.

Now, let’s take a look at the difference between these two documents.

Pre-Qualification

A pre-qualification is a lender’ estimate of the amount you can expect to be approved for during the loan process. Getting pre-qualified is a quick assessment by a lender of your financial situation based on information you provide. It’s often based on what’s called a soft, not hard, credit pull. It’s not quite as convincing to a seller as a pre-approval letter since the lenders don’t ask for verifiable proof of your debt-to-income ratio at this point.

Pre-Approval

The process of obtaining a pre-approval is more involved. Getting pre-approved requires a buyer to fill out a application that allows a lender to determine their financial situation, including their debt-to-income ratio, ability to repay and credit-worthiness. Once this is in hand, your lender can give you a letter stating the exact loan amount you’ve been pre-approved for along with the total sales price you are approved for. The letter will usually indicate both your estimated down payment along with the potential interest rate. Because it is much more thorough, most sellers prefer to see a pre-approval letter with an offer.

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