You don't just walk in out of the rain, ask a bank for a mortgage, and get a check for several hundred thousand dollars. Getting that kind of money takes time. That's why it's a good idea for home shoppers to start lining up their financing well before they're ready to write an offer. Qualification and pre-approval represent milestones in this process, and while you may hear the terms used interchangeably, there's a major difference.
Mortgage qualification is commonly referred to as "pre-qualification," but the "pre" is a tad unnecessary, since what the lender is doing here is simply qualifying you. Nevertheless, it's the language of the mortgage industry, so when you see it, just smile and play along. Qualification is nothing more than a lender's opinion about whether you can afford a mortgage of a certain amount. In most cases, that opinion is based only on what you tell the lender about your income, your assets and your debts. The lender often won't even verify the information at this stage; nor will it check your credit report. A qualification does not represent any kind of commitment on the part of the lender.
The "pre" in pre-approval actually means something. When you're pre-approved, it means the lender has verified information about your finances, reviewed your credit report and concluded that you can indeed afford a mortgage of a certain amount. Pre-approval indicates that the lender is ready to move ahead with writing you a mortgage. Even so, you still haven't officially been "approved" for a loan, which is why the "pre" part is significant.
What Approval Means
For you to obtain a mortgage, your lender doesn't have to approve just you. It also has to approve the home you want to buy. You may be able to afford, say, a $200,000 mortgage, but the lender isn't going to lend you $200,000 unless the property is worth that much. That's because the house you buy will serve as collateral for the mortgage. If the bank's going to lend you $200,000, it needs to know that there will be $200,000 worth of house for it to foreclose on in the event you aren't the upstanding person it thought you were. Pre-approval represents a commitment from a lender, but the actual approval is contingent upon you finding an acceptable property.
Most home mortgages have a term of either 30 or 15 years. When you're dealing with that long of a time frame, seemingly small differences in interest rates can translate into tens of thousands of dollars worth of interest payments. So the ability to "lock in" a good rate is critical. Different lenders set their own policies on what the industry calls "rate locks." Some might let you do it at the qualification stage; others might not allow it until pre-approval or even approval. Some charge a fee for a lock, then refund it when you close the loan. Ask lenders about their lock policies, and keep them in mind when shopping around.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.