Pre-Approved vs. Pre-Qualified: Which is Right for Your Loan?

Why Is It Important to Get Pre-qualified or Pre-approved?

Being pre-qualified before you start looking at properties is an important first step so that you don't waste time looking at (and potentially falling in love with) homes you can't afford. With expensive, high-end homes, some sellers require proof of pre-qualification before they will grant showings.

In a hot real estate market, including a pre-approved loan letter is far better than including a pre-qualified loan letter. If a seller has multiple offers, they want to choose one with a low risk of falling through due to financing. A pre-approval letter shows that you're a serious, vetted buyer with a high chance of securing financing.

What Happens If You Are Denied a Mortgage After Pre-approval?

It is not impossible that a bank will deny you a mortgage even after they've issued you a pre-approval letter. First, a pre-approval for a mortgage is based on the borrower's financial situation at the time of application. If the buyer loses their job, takes on substantial new debt, or stops making payments on existing loans and experiences a drop in their credit score, the lender can deny the loan during underwriting, which is the final approval process.

The loan offer is also contingent on the property appraising at or above the sales price. If an appraiser believes the home isn't worth the selling price, the bank can reject the loan. In this case, you have some options. You could provide a larger down payment that makes up the difference between what the house appraised for and your accepted offer. You could also ask the seller to drop the price of the home to match the appraisal. Or, you could go for a compromise, combining both of these options.

Are There Any Other Options Besides Getting Pre-approved or Pre-qualified for a Loan?

Yes. You could make an offer without a pre-qualification or preapproval letter.3 However, these letters — especially a pre-approval letter — let the seller know that you're a serious buyer and have a high chance of getting the financing you need to actually buy the house. This will greatly improve the chances that the seller will say "yes" to your offer. And in a hot market, they're essential for anyone who needs financing to buy a home.

Another option is to pay cash for your home. In this case, you wouldn't need a pre-approval or pre-qualification letter from the bank. You would simply provide proof of funds documentation with your offer.

A new home is often the largest purchase you'll make and getting approved for a mortgage loan can help you realize the dream. Pre-qualification and pre-approval letters can help make the process go as smoothly as possible.

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