The Importance of Pre-Qualification and Pre-Approval

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What is a letter of pre-qualification or pre-approval?

Although they generally serve the same purpose, a letter of pre-qualification and a letter of pre-approval differ in characteristics. Later we break down the differences and why it matters. For now, we will keep it simple and group the two together for a general definition to address what they are and how they can affect you.

These letters are documentation of potential financial backing from third parties. That’s pretty much the basic idea. They are NOT commitments and having them does not mean that you will definitely get a loan. So this means that the letters show that someone out there (usually some bank) has evaluated your financial situation and estimated how much of a loan you might be able to get from them.

This is important because when it comes to buying a house, most people are unable to purchase 100% of the the house with pocket money. This means that for these people they need to borrow money to get a house. These letters are essentially used to show the seller that someone is willing to back up the buyer financially.


The key difference between the two kinds of letters is in the details. They serve the same purpose but have different impact on your buying process.


Getting pre-qualified for a loan means that you have been provided a rough estimate on how much you could get given your current financial status. Keep in mind that the financial information used for the estimate is provided by you the buyer. The loan originator does not verify or review the information for a pre-qualification.


Pre-approval is the next step after pre-qualification. For this step, you would have to submit an application. The loan originator will pull your credit and actually review financial information. Pre-approval is more official than a pre-qualification. There is a more thorough analysis of financial standing which results in a more accurate loan estimate.

Why get pre-qualified or pre-approved for a loan?

Placing an offer on a home is about more than just the price involved. Lots of factors are at play during any given real estate transaction. Since most sales often take some time to complete, anything that could jeopardize it is a concern for the sellers.

Conversely, anything that helps to secure the sale is a benefit to the seller. This is exactly what a letter of pre-qualification or pre-approval seeks to do. By having this available, your offer will look more appealing because you’re basically telling the seller not to worry since you will likely be able to afford the house.

If you’re looking for a home to buy and you know that third party financing will be needed, then getting pre-qualified or pre-approved for a loan will only help. In fact, it’s almost necessary.

When to use

The strategic decision of getting one or the other really comes down to how motivated you are to get a new home. For some people that may just be looking at new homes but are unsure for whatever reason, getting a pre-qualification letter is almost always a good idea. It’s pretty simple to do.

But if you’re set on moving and feel a necessity to get a new home because of a job change or as a first time home buyer, then going through the process of getting pre-approved on your loan will put you in a favorable position to place an offer. The seller will know that you are taking the transaction seriously.


Getting a letter of pre-qualification or pre-approval is an important step in the home buying process. It provides support to show the seller that your offer is serious. It also gives you an idea of what price range may be affordable during the home search.

However keep in mind that having the letter does not necessarily mean that the loan has been secured and offered. It’s simply an estimate that shows that you have the intention of buying a home at the given price.

There are also important differences between the two options to keep in mind. But when faced with the decision of whether or not to get the letter, remember that in many situations having it may be better than finding yourself empty handed. Especially when your dream home may be someone else’s as well.

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