How are pre-approval & pre-qualification letters different?
There's an important distinction to be made between mortgage pre-approval and pre-qualification letters.
A pre-qualification is an estimate of the loan amount you can expect to be approved for during the loan process. Getting pre-qualified requires a quick assessment of your financial situation by a lender. It's based solely on the information you provide and not verifiable proof of your financial situation. For this reason, most buyers won't accept a pre-qualification with an offer.
A pre-approval is a more formal commitment to finance the purchase of your home and is obtained through a more thorough process. Getting pre-approved requires filling out a mortgage application & providing info so that lenders can confirm your financial situation and credit rating. Once they have verified your debt to income ratio (the percentage of your monthly income that goes to paying your mortgage, loans, credit cards, child support, etc), lenders will issue you a letter stating the exact loan amount you’ve been pre-approved for along with the total sales price you are approved for. The letter will usually indicate both your estimated down payment along with the potential interest rate. As it requires more thorough financial vetting to get a pre-approval letter, most sellers prefer to see pre-approvals submitted with an offer.