One set of terms that gets confused a lot in the world of mortgages is "pre-qualified" and "pre-approved." There are very few people that haven't gotten a letter in the mail that says they've been pre-qualified for a rather large amount of money to buy a home with. However, what do those terms really mean?

First, merely being pre-qualified does not get you into the home of your dreams. All pre-qualification revolves around a basic estimate of how much home you could afford based on a few broad factors, like how much you make yearly and any other assets you own. It is not very specific and is usually done at no cost at all.

This is far different from being pre-approved, which means that you are actually going through the first stage of the mortgage approval process. Usually, becoming pre-approved means paying an application fee and having your full financial background checked out to come to an exact amount you can get a loan for.

The bottom line is that becoming pre-qualified gives you a small picture of what you can expect to have approved for a home loan, whereas becoming pre-approved gives you the entire picture. This is not to say that being pre-qualified is a step you should avoid.

If you know that buying a home is still many years away, pre-qualification can help you see how much house you can afford in order to determine how much you need to save for a down payment. Building a strong down payment is a great way to show lenders that you are truly serious about purchasing a home and taking full responsibility for all the expenses associated with it.

Overall, this is just one set of terms in the greater scheme of mortgages. By taking the time to learn the ins and outs of getting a mortgage, you get one step closer to the home of your dreams!