Mortgage Qualification Versus Mortgage Pre-Approval

April 5, 1999, Revised June 6, 2006

"If we shop around for a mortgage and become qualified, is there a time limit on how long we can hold the lender to the qualification?"

Lenders do not commit themselves to anything when they qualify a potential borrower. Hence, there is nothing to hold them to.

What Is a "Qualification"?

Qualification (or "pre-qualification" as it is often called) is simply an opinion by a lender (or someone else) that based on information you have provided covering your income, assets, and debts, and given current market interest rates, you qualify for a loan of some specified amount. If any of the information you provide turns out to be different, or if interest rates increase, the opinion is subject to revision.

The opinion also assumes that your credit is satisfactory. If that turns out not to be the case, the qualification will be withdrawn.

What Is a Pre-Approval?

You may be thinking of a "pre-approval", which is designed to make it easier to shop for a house, and does involve a commitment by the lender to make a loan prior to the identification of a specific property. On a pre-approval, unlike a pre-qualification, the lender verifies the information you provide and has checked your credit.

The lender's commitment under a pre-approval, however, probably will be expressed in terms of a monthly mortgage payment rather than a loan amount. Since the interest rate is not known at the time the pre-approval is granted, lenders are reluctant to commit to a specific loan amount for fear that a rate increase would increase the monthly mortgage payment to an unacceptable level relative to the applicant's income. If this were to happen, the loan amount corresponding to the approved monthly payment would drop, and the applicant would either have to increase the down payment or buy a less costly house. This is why a pre-approval has limited value.

To convert the monthly mortgage payment in a pre-approval into an approved loan amount, the interest rate must be fixed. For this you need a rate lock commitment from the lender, which will specify the rate, points, loan-to-value ratio and other features of the transaction. A rate lock is not usually given until you submit a complete application, and it may require paying a fee.