The terms “prequalification” and “preapproval” are often confused, and even misused interchangeably, when really in dealing with mortgages, the two are like comparing apples to oranges.

Both prequalification and preapproval are steps taken prior to applying for a home loan, but the major difference lies in the level of commitment between the lender and the home buyer.

As a seller or a buyer you should know the difference and what they mean.

What does it mean to get pre-qualified?

Getting prequalified is usually the first step in the home-buying process, before applying for a mortgage.

The purpose of a pre-qualification is to give you an idea of the size or amount of the mortgage that you can apply for and what type of real estate you’ll be able to afford. But it is just that, a ballpark estimate. In other words, the lender will take your word for it and give you their best guess as far as the mortgage you would be eligible for were you to actually apply.

For this reason, the prequalification process is pretty quick and fairly painless, but may not mean a great deal to sellers or their agents, as it is just an approximate calculation.

When getting pre-qualified, you will provide your lender with:

• Estimates of your personal finances including debt, income and assets
• An informal idea of your credit score

What does it mean to get pre-approval?

On the other hand, when you’re ready to begin the process of applying for a mortgage, that’s when getting pre-approved comes into play.

Getting “pre-approved” is a more extensive process, involving the completion of an official mortgage application as well as submitting supporting documentation to back-up your financial claims. The lender will then take steps to analyze and verify all of the information that you’ve provided.

When getting pre-approved, you will provide your lender with:

• Verified records of personal finances including tax returns, pay stubs, a list of assets and bank statements
• An official credit score and credit report

If all goes well, your lender will handover a pre-approval letter stating that you have met the criteria and are in good standing to secure your mortgage. This letter is usually valid for around 60–90 days and is a conditional commitment, meaning that if something changes during that time, such as your employment status or credit score, the lender is not required to provide the loan.

Even though pre-approval is not a 100% guarantee, it’s a good idea to get pre-approved when shopping for real estate. Taking this extra step gives you leverage in negotiations, proving to sellers and their agents that you’re good for your offer. It’s a more official way of saying- “I’m a qualified buyer who’s both serious about and can actually afford this purchase.”

Pre-approvals are much more thorough and a far better indicator of your ability to get a loan than just a pre-qualification.  However, there is one extra step that can really help your offer, and instill confidence in your the sellers.  That additional step is called pre-underwriting.

What is pre-underwriting

Pre-underwriting essentially takes the promise of a pre-approval a step further. With this, the mortgage company has already vetted your financials and agreed to give you a mortgage up to a specified price. This time, it is a guarantee. By the time you submit an offer on your home of choice, you’ll have already cleared any conditions that the mortgage company may have and they’ll have given you a firm commitment letter.

Why pre-underwriting makes a difference

As a buyer, taking this extra step can help make your offer more attractive to sellers and also give you the confidence to make an offer stand out.  Since you already have a firm commitment in hand, you may not need to include a financing contingency, which would allow you to back out of the deal if you were unable to get financing. Offers with fewer contingencies usually go over well with sellers because there are fewer opportunities for the deal to fall apart.

With a pre-approval, your financial documentation—like W-2s, pay stubs, and bank statements—typically stays with your lender. He or she will look through it to make sure there are no real red flags and will run a credit check before issuing your pre-approval. However, your financials won’t truly be examined by the lender until after your offer has been accepted.

In the case of pre-underwriting, the examination happens upfront. You’ll need to present the same financial documentation as you would for a pre-approval. However, this time, your documents will be handed off to an underwriter, usually one that’s in-house. He or she will thoroughly vet your financials to evaluate the risk associated with granting you a loan and then, either sign off on a commitment to give you the loan or reject your application.

Since pre-underwriting is a more intensive process, it takes an expert and it takes time. If you decide to go this route, you’ll want to choose a mortgage company that has in-house underwriters and experience with these types of loans. You’ll also to leave a few weeks to undergo the underwriting process before you decide to submit an offer.

When pre-underwriting might be worth it

In highly competitive markets pre-underwriting may just be the thing that gives you the edge over other buyers.

As a seller, check with your agent to make sure the offer you receive has been pre-underwritten, that should make you feel that the buyer’s loan is a sure thing.