There is an abundance of financial jargon used by all types of lenders and financial institutions. You may have gotten a letter in the mail prequalifying you for a loan, or you may have read advice to get pre-approved for a mortgage. These two, commonly-used phrases are one of the best examples of this jargon, and are often thought to have the same meaning by unknowing consumers. Although the meaning is similar, it differs in some vital ways. Read on to learn the important difference between pre-qualification and pre-approval.
The meaning behind being pre-qualified
Since getting prequalified usually comes before any application or stricter look at your financial situation, the lender can reserve the right to deny you the loan or give you less favorable terms after the application.While both terms involve working with a lender to figure out if you’re able to receive a loan from them, getting prequalified is a much simpler process and does not hold as much weight. You can receive a pre-qualification for a loan if you let a lender know your financial status. The lender can then estimate how much they might be willing to lend you based on your analysis of your finances.
The meaning behind being pre-approved
While pre-qualification has the lender taking your word for the provided financial information, getting pre-approved means the lender verifies that financial information with an actual paper trail. This means that getting pre-approved will often take more time, and require you to provide more documents – but it will also allow the lender to give you loan terms and rates in writing. Having the pre-approval in writing basically guarantees that you’ll receive the loan with those specific terms, barring any extenuating circumstances.
We highly recommend all consumers interested in buying a house get pre-approved for a mortgage before going house shopping. That pre-approval letter will help determine your budget, and let the seller know that you are serious about their home. An offer that has been pre-approved is almost always accepted over an offer that is waiting on financing to come through.
If you’re looking to get pre-approved for a loan, make sure you have these supporting documents ready for your lender:
- W-2s
- Pay stubs
- Summary of assets
- Summary of debts
Also, expect the lender to obtain a copy of your credit report to verify all information. This will not hurt your credit score if you complete the loan process within a 30-day window of running the report.
Which process do we recommend?
Want to learn more financial terms so you’re prepared to tackle your future financial goals? Sign up to receive updates from the Cents to Save blog today. We’ll email financial news and advice straight to your inbox. Sign up today!If you are serious about getting a loan, always aim to be pre-approved and have the loan terms and rates in writing. If you are still researching loans or lenders, getting pre-qualified could be a good way to talk with specific lenders to find out if they are the right fit for you or if the loan you’re looking at is right for your financial situation.