Because they sound similar, people often think that being pre-qualified for a home loan is the same thing as being pre-approved for one. However, being pre-qualified for a home loan is quite different than being pre-approved for one, and it is important to know the difference and not confuse the two. Basically, pre-qualifying is the first step in the mortgage process; pre-approval is the second to last step, right before full approval.
When a potential home buyer is pre-qualified for a home loan, it means that a lender has given the potential buyer an opinion as to the range of home prices that should fit his budget. Pre-qualification is usually based on a quick credit check and conversation with the buyer. Pre-qualification provides a realistic idea as to what type of home the potential buyer should be looking at, and, even if the buyer isn't ready to commit to purchasing a home, helps the buyer make important financial planning decisions for when he is ready to commit to the home-purchasing process. Often, real estate agents have potential buyers seek pre-qualification before taking them out to look at homes.
Pre-approval, on the other hand, means that the potential buyer has submitted almost all the documents necessary to be granted a home loan. The lender has checked the potential buyer's credit and other financial information, and is reasonably certain that it will extend a loan to the buyer. At this stage, the buyer knows the maximum amount the lender will give her, and she is in a stronger bargaining position with the seller because she is a viable buyer who will be able to close more quickly than a buyer whose loan has not already been approved.
Beyond pre-approval, a potential buyer can be fully approved. This means that the lender has already committed to extending a loan to the potential buyer; it is almost the same as having cash in hand. Full approval is often subject to receiving a clear title report and appraisal. The title report and appraisal help to help determine the final loan amount - a lender won't loan more than the appraised value of the home, no matter what amount the buyer has been approved for. This is the strongest position for a potential buyer to be in because the seller knows that the buyer will be able to complete the transaction quickly
Basically, a prequalification is no commitment at all, but only a tentative acknowledgement from the lender that you might be eligible for a loan. A 'preapproval' is an actual commitment from a lender to make a loan in a specific amount.
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