Mortgage Preapproval vs. Prequalification: Know the Difference
Point of Interest
Prequalification is an early, informal step in the home buying process that delivers a ballpark estimate of your home loan options. Preapproval involves a formal mortgage application and data verification like a credit check.
Tip: When you’re in the preapproval process, make sure you’re cautious about your spending (this isn’t the time to open a new credit card or buy a new car). Lenders want to see consistency.
When buying a home, it’s important to be prepared and show sellers you’re serious. One strategy to demonstrate your intent to buy is getting prequalified or preapproved. Although these terms are sometimes used interchangeably, prequalification is typically a less formal step based on estimates of your income, assets and other financial data. Preapproval, on the other hand, normally refers to the actual verification of the data you provide, a credit check and an official mortgage application.
When it comes to being prequalified vs preapproved, the preapproval process is the closest you can get to verifying your creditworthiness without an actual purchase contract in hand.
What is a mortgage preapproval?
Preapproval is a formal process that helps certify your creditworthiness and ability to borrow money to buy a home from a lender. To be preapproved, you’re required to submit an official mortgage application plus documentation proving your financial background and credit. After reviewing your materials, the lender and pre-approve you for a mortgage up to a specified limit. You’ll receive a good idea of your interest rate as well.
After your lender reviews your financial data and everything checks out, you’ll get a preapproval letter. This letter gives you a leg up in the homebuying process if you’re competing with another potential buyer who doesn’t yet have a lender and funds waiting.
To get preapproved, you’ll need to submit:
- Pay stubs
- Credit check
- Bank account numbers
- Down payment amount
- W2 statements
What is a mortgage prequalification?
When comparing prequalified vs preapproved, both have their benefits, but mortgage prequalification should be your first stop when you’re considering buying a house. It involves sending a lender your financial information, including your earnings, debts and assets. After the lender evaluates your information, you’ll get an estimate of your potential mortgage. In most cases, prequalification is quick — it can be done over the phone or online, usually for free. You’ll get an answer to your prequalification in one to three days, depending on the lender.
Prequalification, on the other hand, doesn’t involve any hard inquiries or serious verification, so the estimate you get is a ballpark number. Rather than using the number you’re given as a firm estimate, it’s better to use it as a guide for how much a lender might give you. It can help you determine your budget for a mortgage and what houses are in your price range.
Preapproval vs. prequalification: key differences
Preapproval vs. prequalification: key differences
|Credit Inquiry?||Application fee?||Mortgage app required?||Will I get a loan estimate?||Will I get a specific loan amount?|
When to consider preapproval
When you’re ready to make an offer on a home, it’s a good idea to go beyond prequalification and get preapproved for a mortgage. A preapproval letter from your lender signals you’re ready to buy a home and you can afford it. That letter is a golden ticket proving to lenders that your bank or lending institution has agreed to issue the mortgage.
Sellers only want to work with buyers who will follow through. If you choose not to get preapproval, you might be passed up for a more serious buyer with a lender and loan funds linked up already.
Before you start the preapproval process, make sure your finances are organized. Consider creating a checklist of everything the lender needs. Missing documentation can seriously slow down the preapproval process.
When to consider prequalification
Prequalification is the first step you should take when you’re ready to buy a house. Don’t skip it because it’s a great chance to better evaluate your finances and inspect your debts, income, credit history and savings.
Prequalification can help you figure out the mortgage you can afford, so you’ll be able to approach the house-hunting process from a more reasonable perspective. It’s never a good idea to look for houses, fall in love with one outside of a comfortable price range, and then agree to a home loan that puts you at undue financial risk. In fact, without a prequalification, you might not even think you’re looking at homes outside of your price range. Prequalifying keeps your expectations in check.
Once you’re ready to make an offer on a home, you can move on to the preapproval process.
Is prequalification the same as preapproval?
Some lenders use the terms interchangeably, but prequalification generally refers to an informal way to get an estimate of your potential mortgage using your own estimates of your income.
Do prequalifications hurt your credit score?
Typically, prequalifications only involve a soft inquiry into your credit, so they won’t affect your credit score. Preapprovals, on the other hand, can mean a temporary ding on your credit since they require a hard inquiry.
Does preapproval require a credit check?
Yes, preapproval requires a credit check because your creditworthiness and ability to borrow requires more formal evaluation in this process.
Is prequalification a hard inquiry?
No, prequalification doesn’t involve a hard inquiry. Lenders will do a soft pull to your credit, meaning that it won’t show up on your credit report afterward.
The final word
If you’re on the home-buying journey, both prequalification and preapproval are smart steps to take on this path. Prequalification allows you to get an idea of the loan options you might get approved for and helps narrow down your search. Preapproval, on the other hand, shows a seller your intent to buy with verifiable evidence of your ability to pay. Although preapproval is more formal, it still doesn’t serve as an official loan offer.
That said, a preapproval letter can help establish your creditworthiness and may give you a competitive edge over other prospective buyers who haven’t taken that step.