Mortgage Appraisal vs. Mortgage Approval: Which is Better?
Get pre-approved or pre-qualified for a Mortgage can be two important steps when you want to buy a home. You’ll know how much you can borrow, which will help you budget for your purchase. And you may receive a letter from your lender stating that you’ve been conditionally approved for the loan, which can be important when submitting an offer in a competitive market. You’ll also get a better understanding of the range interest rate available to you.
Read on and we’ll explain what these two similar-sounding terms mean for potential home buyers.
Find out more: How to buy a house, step by step guide.
Pre-Qualified vs. Pre-Approved: The Key Difference for Home Buyers
Understanding the difference between pre-qualification and pre-approval can be confusing because some lenders don’t use the terms consistently. But the most important thing to remember is that there are two ways to get an estimate from a lender.
We will define mortgage pre-qualification as the simpler process and mortgage pre-approval as the more complex process because it fits what many lenders use.
- Mortgage appraisal (less complicated): A process that asks you to estimate some basic information, such as income, debt, and credit score. Within seconds or minutes, you will be able to know how much money you can borrow based on the information shared.
- Mortgage pre-approval (more complicated): There is also a process that may require you to complete an application, submit copies of documents, and grant the lender permission. check your credit. It may take a few hours or days to get results, but the lender can give you a more accurate maximum loan amount and estimated terms based on current mortgage rates.
Some lenders differentiate between the two processes by calling the more complex process pre-approval. However, to go back to the more potential confusion, they may call the simpler process pre-appraisal or pre-approval.
Here are some things to keep in mind when seeking mortgage pre-approval or pre-qualification, based on how we interpret the terms above.
| Prequalification | Pre-Approval |
| Estimate how much you can borrow based on self-reported information. | Estimated loan amount and terms based on verified documents. |
| May include credit checks resulting in soft inquiries. | May result in a credit check and require a thorough review of all three of your credit reports. |
| It can be a good place to start when you are first considering buying a home. | Useful before viewing a home and making an offer. |
When to Get Pre-Approved vs. Pre-Approved
Pre-qualified funds can be a good starting point if you’re thinking about buying a home and want to know how much you can borrow. You can use the results to set goals while save money for down payment and closing costsand set filters when searching for homes online.
Find out more: How much should a down payment be for a home?
When you’re serious about looking for a home, getting pre-approved for a mortgage may be a better option. Lenders evaluate many of the same information and documents they use to approve your mortgage, which can give you more confidence that you’ll be approved for a mortgage with similar terms. If you don’t get pre-approved today, you can still find out what you might need to do to increase your chances of getting pre-approved later.
However, even being pre-approved does not guarantee that you will eventually be approved. Even if your finances and credit remain the same or improve, a lender may not approve your mortgage based on other factors, such as the condition of the home, its valuation, and whether you can afford it. home insurance.
What is a mortgage pre-approval letter?
Another reason to get pre-approved for a mortgage is that the lender may provide you with a pre-approval letter.
- The letter will state how much you can borrow based on the information the lender has reviewed.
- You can attach this letter to your loan offer to make your offer more attractive to the seller of the home you are eyeing.
- Lenders can work with your real estate agent to customize the letter for each offer.
Maybe you fall in love with a house listed for $400,000 and want to submit an offer. Let’s say you’re pre-approved for a loan of up to $450,000 and can afford a 20% down payment, but you don’t want to overpay. Instead, you submit an offer for $405,000.
There are different rules of thumb, but some agents may suggest you include a letter showing that you are pre-approved for $450,000 and can borrow more if the home is underpriced or unexpected costs arise. Others may suggest you include a letter with a pre-approval of $405,000 so that you don’t reveal your amount.
In either case, let’s say the seller receives your offer and a competing non-cash offer for $410,000. Even if they have the potential to get more money from other buyers, they may still decide to accept your offer because they feel the chances of the deal falling through are lower.
Depending on your lender, your pre-approval letter may be valid for 30 to 90 days. If it expires before you buy a home, you may need to submit updated documentation or information to receive a new letter.
What documents do you need to get pre-approved for a mortgage?
The pre-approval process will vary by lender, but generally you’ll need to create an online account and submit various types of information and documents, such as the following.
Personal information
- Name, current address and contact information.
- Government issued photo identification.
- Social Security number and card.
- Immigration related information.
- Work history for the past two years.
- Rental history for the past two years.
- Information about other properties you own.
Income and tax information
- Recent payslip.
- New job offer letter.
- Verification of self-employment income, such as your company’s financial statements.
- Proof of other types of income, such as disability benefits or alimony.
- A gift letter if you receive a gift.
- Tax returns for the last two years.
- Recent W-2 and 1099 forms.
Account report
- Check and save.
- Agency.
- Retirement accounts like IRAs and 401(k).
- Loan.
- Credit.
Pre-approved with multiple lenders
Mortgage shopping can be important to getting a mortgage with the most favorable terms. Depending on your situation, that could mean a low interest rate, low closing costs, access to First Time Home Buyer AssistanceOne large loan amountor one adjustment ratio.
Find out more: How are mortgage interest rates set by lenders?
Since mortgage brokers and lenders have access to different types of mortgages and programs, you can try to get pre-approved multiple times and compare your options. Generally, lenders and brokers will require similar paperwork, so just take the time to submit everything to each company.
If you’re not familiar with the term, a mortgage broker is a professional who can help you compare mortgage offers from different lenders. Lenders typically pay brokers a fee for bringing them new customers.
Having multiple pre-approvals can also help you succeed later. You may want to wait to choose a lender and lock in your interest rate until your home purchase offer is approved. And if you’re pre-approved with multiple companies, it may be easier to compare offers based on payday rates and then choose a lender.
Carried away
Pre-appraisal and mortgage pre-approval are two ways to see how much you can borrow to buy a home. While some lenders use these terms interchangeably—or even offer different terms, like verified pre-approval—pre-appraisal is generally the less stringent and more useful of the two.
When you’re serious about buying a home, a pre-approval letter can make your offer more competitive. Getting pre-approved with several lenders can also help you get a better idea of your loan limit, estimated interest rate, and monthly payments.
Find out more: How much house can you afford?
