Real estate experts advising home buyers to secure mortgage pre-qualification or pre-approval is pretty routine. Both are helpful tools that give sellers peace of mind and buyers a competitive advantage. But what exactly are pre-qualification and pre-approval? Furthermore, how do they help buyers?

For the record, neither term has a hard and fast definition that all lenders adhere to. In fact, many lenders use the terms interchangeably. Things are different when you are talking with real estate agents and sellers. They are looking for something very specific when they request either mortgage pre-qualification or pre-approval.

This post will rely on generally accepted terms as explained by Salt Lake City’s CityHome Collective real estate brokerage. CityHome  Collective offers professional real estate services as well as interior design.

Mortgage Pre-Qualification

Mortgage pre-qualification is a scenario in which a lender agrees that you qualify to borrow so much money based on your financial circumstances. Let’s say you work with a Salt Lake City lender who comes back and says you qualify for a $150,000 loan. That lender might provide you with a pre-qualification letter you can submit with any offers you decide to make.

Pre-qualification is not a commitment. It does not guarantee you will actually get a loan. It is simply a statement that says you can probably get a mortgage for so much. It says you have the financial resources to afford houses up to a certain price point.

Quite often, pre-qualification doesn’t require a hard credit check. You might also not have to provide documentation proving your income, assets, etc. You just self-report. However, all of that will change when you actually apply for a mortgage. Then you will need documentation. That’s when the lender will do a hard credit check as well.

Mortgage Pre-Approval

Mortgage pre-approval is one step up from pre-qualification. In a pre-approval scenario, a lender is saying they are actually willing to lend you so much provided the underwriting process goes off without a hitch. Pre-Approval is not quite an ironclad commitment, but it’s just a few steps shy.

In almost all cases, mortgage pre-approval requires the necessary documentation. It almost always results in a hard check on your credit as well. Therefore, it is wise to approach pre-approval cautiously. Having multiple hard checks run on your credit could end up coming back to haunt you later on. Keeping them to a minimum is in your best interests.

Why Sellers Want Them

Knowing the differences between pre-qualification and pre-approval leads to the question of why sellers want them. It boils down to guarantees. While they do not exist in real estate transactions, pre-approval and pre-qualification say to sellers that you are a qualified and serious buyer. It tells them that any offer you make is not likely to fall through.

In a buyer’s market, pre-qualification and pre-approval do not necessarily win you any points. Buyers desperate enough to sell will take less attractive offers just to get rid of their properties. The opposite is true in a seller’s market.

When supply is low and demand is high, sellers are in the driver’s seat. They are more likely to require pre-qualification or pre-approval letters with all offers. That’s why CityHomeCollective says pre-qualification or pre-approval is almost a must in the current market.

If you are thinking of buying a home, research the market first. Consider at least getting pre-qualified for a mortgage, even if you don’t necessarily want to borrow from the lender that pre-qualified you. If you are ready to buy and you’re working with a lender you trust, pre-approval can put you in a stronger position.