What Is a Mortgage Pre-Approval?

The last thing you want is to fall in love with a house that ends up being out of your budget — or even worse, to seal the deal on a house you can’t comfortably afford. Fortunately, you can avoid both of these situations with a mortgage pre-approval or pre-qualification.

A mortgage pre-approval or pre-qualification (lenders often use these terms differently — more on this below) is a process in which you submit financial documentation to a mortgage lender, like a bank or other financial institution. In return, you learn how much they’re willing to lend you and at what interest rate. This closer look at your financial background gives you and your lender a better understanding of how much house you can afford.

An online calculator can give you a ballpark figure, but a pre-qualification or pre-approval from an actual mortgage lender can give you a much more accurate idea of your home budget. That way you can feel confident about your down payment and properly plan for closing costs.

When you make an offer on a house, a pre-approval or pre-qualification demonstrates to the seller you’re serious about the purchase and that you’re likely to be approved for a loan — and both of these qualities make you a much more attractive buyer.

What’s the difference between pre-approval and pre-qualification?

This is where it gets a little tricky, as there’s no hard-and-fast industry-wide definition or process for a pre-approval or pre-qualification. What can help you is taking a look at each mortgage lender’s specific process instead.

Whether it’s called a pre-approval or a pre-qualification, you’ll likely find a lender will offer one of these two options:

• An informal process that relies on self-reported financial information about your income, assets, etc. There’s no hard inquiry on your credit, and the process can typically be done quickly by phone or online (for instance, Ally Home’s online pre-approval process can take as little as three minutes!)
• A formal process that requires additional paperwork, such as W2s, bank statements, etc., as well as a hard inquiry on your credit history. This process is likely to take longer, but you might come away with a more precise number for how much the lender is willing to loan you. That’s essentially because you’ve already provided some of the documents required to start the loan application process.

Expert Tip: As you explore options from different lenders, several of them may conduct a hard inquiry on your credit. As long as they’re all within a relatively short time span (usually 30 to 45 days), it will only count as a single inquiry on your credit history.

Going through a mortgage pre-qualification or pre-approval process can be a helpful indicator to know how much you can afford based on your income. It can also let you know if you should work on improving your credit score before you apply for a loan. Since Ally Home’s pre-approval relies on self-reported information and doesn’t require a hard inquiry on your credit score, you can take the time to work on your credit score, if necessary.