As you prepare to apply for a mortgage, you’ll come across terms like “pre-approval,” “pre-qualify,” and DU. It’s essential to understand what these terms mean - and which one is right for you. When the time comes, they can also help you show the seller you are a serious buyer.

Simply speaking, pre-qualification and pre-approval are types of mortgage approvals, and they refer to the steps the lender takes to verify that a potential buyer can afford a mortgage. 

A few tips to remember: 

Every Lender handles mortgage approvals differently. The steps involved change from lender to lender. Many lenders will use pre-approval and pre-qualification interchangeably, despite having entirely different outcomes for the buyer. 

No matter what type of approval you get, it’s not a guaranteed deal that you will close the loan. Pre-qualification and pre-approval is a way for a lender to help you and the seller estimate what you can afford. After you make an offer on a home, it will still need to be appraised by a third party and inspected for potential repairs before you can close the loan and buy the home. 

What is Mortgage Pre-Approval?

Both mortgage pre-approval and pre-qualification provide borrowers with an estimate of how much home you can afford. However, a mortgage pre-approval is a more official step that requires the lender to verify your finances and credit history. Documents required for pre-approval may include: pay stubs, tax returns, and even your social security card. 

Pre-approval is a more official way to find out what you can afford and adds more credibility to your offer than a pre-qualification. 

What is Mortgage Pre-Qualification?

A pre-qualification means that a mortgage lender verbally collects basic information from you to estimate how much you can afford. Getting a pre-qualification will give you a general idea of how much you can afford and how much you will be approved for when it comes time to close. 

Oftentimes, a pre-qualification relies on self-reported information, instead of verifying your credit history or reviewing your finances. This also means that a pre-qualification leaves you with an estimate rather than a guaranteed number. It’s also much less reliable than a pre-approval, which usually involves your lender checking your credit score and reviewing bank statements and other documents. Going beyond a pre-qualification and getting pre-approved by a loan officer is a critical step to showing you’re serious about buying a home.

What is DU or Desktop Underwriting?

Desktop underwriting, also known as automated underwriting, is a system that lenders use to quickly review a borrower's financial qualifications and decide their loan terms. 

This software scans and reviews applicant information, such as credit scores and cash reserves. It also finds the percentage of the borrower’s gross monthly income that would be needed for the mortgage payment; this includes taxes and insurance. This number is referred to as the housing expense ratio. DU systems can calculate this information quickly, assess a borrower's creditworthiness, and provide swift pre-approval for specific loan terms.

Why is getting Pre-Approved Important?

Getting approval for your mortgage means that a lender has reviewed your finances and confirmed your ability to take on mortgage payments. When you get a mortgage approval, your lender estimates how much you can afford to borrow, what your interest rate could be and how much your mortgage payments could be. You and your real estate agent can use this information to focus on homes you can afford.

A mortgage approval also proves to sellers that you can afford the home they’re selling. Without first securing approval from a lender, the seller might not trust your offer is genuine. Getting approved early in the home buying process is an easy way to know what you can afford and save you time once you find the right home for you. A pre-approval will allow you to stand out to sellers and secure your dream home.