While they sound similar, there's a big difference between mortgage pre-approval letters and mortgage pre-qualification letters. Before we get into how they differ, it is important to learn the term debt-to-income ratio. Your debt-to-income ratio is the percentage of your monthly income that goes to paying your mortgage, loans, credit cards, & child support, etc. Now that you know that term, let's take a look at the difference between pre-qualification letters and pre-approval letters.
Pre-qualification is an estimate of the amount you can expect to be approved for during the loan process. Getting pre-qualified is a quick assessment by a lender of your financial situation based on information you provide. It's not quite as strong as a pre-approval letter since the lenders don't ask for verifiable proof of your debt-to-income ratio at this point.
Pre-approval is more involved and verifiable and, as such, most sellers prefer to see a pre-approval letter with their offer. Once they have verified your debt to income ratio, lenders give 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. It counts as financial documentation for your offer and will be required by a seller. Getting pre-approved requires filling out a mortgage application & providing info so that lenders can confirm your financial situation and credit rating.