What’s the Difference Between Pre-Qualification, Pre-Approval, and Conditional Approval?

Terms like “pre-qualification,” “pre-approval,” and “conditional approval” are commonly heard at the start of the homebuying process. If you’re considering purchasing a new home, it’s likely you’ve come across these phrases during your pre-game research or mixed in within the helpful advice from a trusted financial adviser. Making the decision to enter the housing market as a buyer can be stressful enough on its own, so hearing all these new words and concepts can be overwhelming.

A lot of terms in the mortgage industry are linked together because of their similarities, but they often have small differences that make them unique. Pre-qualification, pre-approval, and the conditional approval letter share common characteristics, but you’ll interact with each of them at different stages in your path to homeownership. Understanding what distinguishes them will save time and help you find the home perfect for your budget and your family.

Pre-Qualification

Pre-qualification is the earliest step among the three terms mentioned and one of the first progressions in the homebuying process. Simply put, it is the act of retrieving an early estimate on how much you might be able to borrow from a lender.

The number is calculated from the information you provide verbally (as opposed to actual paper documentation), your financial history, and your credit report. The lender will then take that basic financial background and give you an approximate figure. Pre-qualification is not overly comprehensive, but it does give you the opportunity to explore all the mortgage options available to you.

After the figure is determined, you’ll receive a pre-qualification letter. You can share the letter with your real estate agent and use it in your offers to sellers to show you’re both committed and prepared to purchase their property.

It’s important to remember that a pre-qualification is not a guarantee of a loan. Although it’s a fantastic way to determine the different loan products available to you, it’s no confirmation you’ll be approved for the exact amount at which your preferred home is listed.

Pre-Approval

Pre-approvals validate exactly how much of a loan for which you are approved. They take a more in-depth investigation, and it’ll occur after you’ve already submitted the mortgage application. The lender will examine your:

• Employment verification (W-2's or 1099’s)

• Bank statements

• Retirement and brokerage account statements

• Other assets

• Current real estate debt or rental statements

• Monthly debt payments (student loans, auto loans)

• Court orders (divorce, child support, alimony, etc.)

• Tax returns

In short, pre-approval is like the job interview before you start the exciting profession you’ll spend the foreseeable future in. But in this case, the job is your dream home.

Like pre-qualification, you’ll get a pre-approval letter if the lender endorses your application. Again, this letter informs sellers the mortgage payment won’t be an issue for you, and you’re the ideal candidate for their home. A pre-approval letter can spotlight your offer above the others because you’ve got the receipts to prove you’re a trustworthy, serious buyer.

Conditional Approval

Conditional approval is often referred to as up-front underwriting. With this option, your lender will thoroughly review your financial make-up to provide you with an accurate and exact loan approval amount for the house on which you’re submitting an offer.

The letter you receive with conditional approval is a pre-approval, but as the name suggests, it comes with a few conditions that must be met before closing. Some examples include purchase agreements, title verifications, home appraisal, and inspections. Although you’ve been conditionally approved for the loan, the underwriter can’t start closing quite yet.

Think of it like when your parents used to tell you that you can go to the pool after you clean your room. You’re almost there, you just need to tie-up a few loose ends. If you can’t meet the letter’s conditions, the closing process can’t start.

Pre-qualification, pre-approval, and the conditional approval letter each validate to both the lender and the seller your financial history and ability to pay a mortgage. And while they each share the same purpose, you’ll encounter them under various circumstances in the homebuying process. Preparing yourself now by mastering their distinguishing features will make you a better-informed homebuyer.