Many people use these terms interchangeably, but they actually refer to two different stages in the mortgage process:
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Pre-Qualification: This is an initial, informal assessment of your borrowing potential based on information you provide about your income, assets, and debts. Lenders use this to give you a general idea of how much you might be able to borrow. However, it's not a firm commitment and doesn't carry much weight with sellers.
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Pre-Approval: This is a more rigorous process where you complete a mortgage application and the lender verifies your financial and employment information, checks your credit, and analyzes your financial situation to determine how much they're willing to lend you. If you qualify, they'll provide a pre-approval letter stating the loan amount, terms, and any conditions that must be met before closing.
To assess your financial readiness for a mortgage, lenders will request various documents that paint a picture of your financial health. Be prepared to provide:
- W-2 forms from the past two years
- Pay stubs from the past 30 days
- Federal tax returns from the past two years
- Bank statements from the past 60 days
- Statements for any investment accounts or other assets
- ID and Social Security number for credit check
- Proof of any supplemental income
- Explanation of any recent credit inquiries
- If self-employed, profit and loss statements and 1099 forms
Your lender will analyze these documents along with your credit report to assess your debt-to-income ratio, cash reserves, and overall financial fitness to determine your maximum loan amount and interest rate.
