Buying an affordable home is virtually impossible in certain housing markets across the country. Thus, many home buyers unknowingly make offers on homes they cannot afford. Before beginning the bidding war on a potential property, it helps to have an indication of an affordable monthly mortgage payment. To receive this information, a mortgage pre-approval is necessary. Some home buyers do not fully understand pre-approvals, and often confuse a pre-approval with a pre-qualification. However, the two processes are very different. Even if a homebuyer is pre-qualified for a mortgage loan, this does not guarantee a home loan.

A mortgage pre-qualification: When a homebuyer is pre-qualified for a mortgage loan, the lender will request information about current debts, income, and so forth. On the flip side, the mortgage lender will not verify the information. Thus, the potential borrower is not required to submit documentation such as tax returns, paycheck stubs, or bank statements. Based solely on stated information within the pre-qualification application, the mortgage lender will determine whether the borrower meet the requirements for a loan approval. Even so, loan approval is not definite.

A mortgage pre-approval: On the other hand, if a borrower obtains a pre-approval from a mortgage lender, the loan is guaranteed. Before a pre-approval is established, the lender will ask for all applicable documentations, and confirm information listed on the loan application. Borrowers must submit most recent banking statements, paycheck stubs for past three months, two year's tax returns (self-employed), assets, and debts. Furthermore, mortgage lenders will review borrower's credit history before a pre-approval is given. While your credit report could have been reviewed automatically and with your permission from an online site, the facts are that verification and other checks are required before a new mortgage is issued.

There is great value to pre-qualifying and pre-approving. At least you will have spoken with a lender and gotten an idea regarding what you can afford and what loan choices might be best for you. But don't be over-sold. Read the fine print about those allegedly-instant "approvals" -- whether online or off. Ask lenders what they mean by such terms as "pre-qualify" and "pre-approval" and when you get that letter which says how much you can borrow, look at the qualifications, reservations, and exceptions.