A pre-qualification is a statement issued by a loan officer. He interviews you, reviews your credit history and other factors that are used to determine your eligibility for a loan, and tells you what size of loan you can be approved for if you want to buy a home. Because the loan officer does not make the final approval, the pre-qualification does not commit the bank to loan you money. He will give you a pre-qualification letter that you can show the seller of a property when you're getting ready to make an offer; this is your proof that you will be able to secure the loan necessary to buy the home.

Pre-approval, however, is better for everyone. This involves a lender reviewing and verifying your credit, down payment, employment history, and all other aspects of your eligibility for a loan. The loan application is given to an underwriter and the bank or mortgage company makes a decision as to whether they will give you a loan or not, and if so, how much. You are then issued a pre-approval certificate.

Pre-approval allows you to close very fast when you find a house, and it gives you a bargaining edge because the owner can see that you are definitely a serious buyer and that the money is available quickly to close the sale. If it's at all possible, get pre-approved for a loan before shopping for a home.