The road to buying a home is filled with many questions, but none are more pressing than those involving your finances. When it comes to purchasing a home, finding your baseline budget is arguably the most important step. It determines what neighborhoods you can hunt in, what banks or lenders you can borrow from, and what your monthly payments will look like. It’s a lot to think about, but the preliminary process of becoming pre-qualified or pre-approved can help.

As the name suggests, these steps can give you a snapshot of what you can afford beforehand. Though they may sound the same, there are key differences that set the two apart. Understanding the basics of pre-qualifications and pre-approvals isn’t just helpful for you but also for the lending facility you choose and your realtor. Whether you’re buying your first home or second, these steps could be beneficial to your process. Below, we break down each step, including its benefits and drawbacks.

What is a Mortgage Pre-qualification?

Of the two options, pre-qualification is less involved and less detrimental to your financial standing since it doesn’t involve a hard credit check. During the pre-qualification phase, potential homeowners meet with a lender to learn more about the mortgages they offer and the details of the terms. Consider it like a consultation or preliminary step to the home-buying process. With self-reported information, the lender is able to determine if you’d be a good fit for their loan requirements. This quick snapshot usually results in an answer right away.

If the lender determines you are a competent candidate, they may issue a pre-qualification letter, which you can use when house hunting. While the letter doesn’t hold much weight without a credit check, it can help realtors determine your budget during the shopping process.

What is a Mortgage Pre-approval?

Though the pre-approval process is more involved than a pre-qualification, it can be more beneficial in the long run. In this step, prospective buyers are still meeting with lenders, but the conversation about financial standing is much more serious. Along with self-reported information, it typically involves a hard credit inquiry and supportive documents for proof of income—think W-2 papers and bank statements. The process is much more involved then the former and can impact your credit. However, a thorough review provides realtors with a more accurate depiction of what the buyer can afford.

Key Differences

• Pre-qualifications don’t require a hard inquiry and only use self-reported information.
• Pre-qualifications provide an estimate of what potential buyers can afford.
• Pre-approvals require official financial documents and often a hard credit inquiry.
• Pre-approvals may impact your credit.
• Pre-approvals provide a more accurate view of finances and what potential buyers can afford.

Are Pre-qualifications or Pre-approvals Necessary?

When shopping for a new home, these preliminary steps may be helpful but aren’t required. Going through the pre-approval process or having a pre-qualified letter present shows you’re serious about purchasing a home and that you’ve done the legwork to see what shape your finances are in beforehand. Finding a lender is an essential part of buying a home, and these steps can ease the process with the lending facility. Ultimately the decision is yours, but getting pre-qualified or pre-approved can go a long way when it comes to shopping for your dream home.