What is the Difference Between Pre-qualified and Pre-approved?

When you're shopping for a new home loan, you ideally want to be as prepared as possible when negotiating with a seller. If you get a letter in the mail saying that you're pre-qualified for a loan, your heart may race as you consider all of your house buying options. Don't get too excited yet -- getting pre-qualified simply means that a lender has generally assessed you as a good candidate for a loan.

You're not guaranteed anything. Indeed, getting pre-qualified is a good sign -- it suggests that your financial ducks are in a row -- but your lender will want to check out your credit history, your income, your forecasted earnings, your assets, your liabilities, and your target properties.

Getting pre-approved also doesn't guarantee that you'll get new home financing. However, it is a step closer. Lenders pre-approve borrowers by assessing their riskiness, checking out credit reports and asking general questions about income, savings, assets, and so forth. Once you're pre-approved, you can get a detailed analysis of ?how much home? you can afford, and you can shop much more accurately for properties in your target market.

That said, any number of factors could change the dynamic between you and your lender. If you overstate your income during the pre-approval phase, you may not get the amount of money promised during pre-approval. If new blemishes appear on your credit record, or if your income forecast changes drastically during the house hunting phase, you can similarly run into trouble.

Moreover, while lenders pride themselves on being able to abide by their pre-approval promises, you may be surprised by ?tacked on? fees that appear near or at closing. A lender may promise a certain amount during the early stages only to bump that amount up based on lawyer's fees, property appraisals, and other sundry costs.

Generally, your lender won't change your closing costs by more than 10 percent to 15 percent without giving you a heads-up well before closing. In general, getting pre-approved is a good idea in that it can save you time by helping you narrow your field of focus early in the home search process.