Prequalified vs. preapproved: What’s the difference?
Key takeaways
- Prequalification is a simple process that provides a general indication of whether you’d qualify for a mortgage.
- Preapproval requires extensive financial documentation and provides a much firmer maximum loan amount.
- You can’t use a prequalification as evidence of financing when making an offer on a home.
Mortgage borrowers — and some lenders — often use the terms “prequalified” and “preapproved” interchangeably, but they aren’t quite the same. Both relate to steps you may take to prepare to apply for a mortgage, but there are some key differences.
What’s the difference between being preapproved and prequalified for a mortgage?
“The main difference between prequalification and preapproval is the level of verification involved,” says Stephen Kates, certified financial planner and financial analyst for Bankrate. “Prequalification is typically based on self-reported information and may not be entirely reliable. Preapproval is a more thorough process that requires borrowers to submit documentation to verify key financial details, like income, assets, and credit history. As a result, preapproval signals a stronger intent and greater ability to borrow than prequalification.”
Because of this, preapprovals carry more weight when trying to buy a home. Home sellers and real estate agents will be more likely to work with you if you have one.
| Prequalification | Preapproval | |
|---|---|---|
| Financial documentation | Self-reported information only | Lender will verify your documentation, including paystubs, bank returns and account statements |
| Loan amount & interest rate | Estimates | Exact (pending a rate lock) |
| Time required | Often available within minutes | Could take multiple days |
| Credit check | Soft credit check | Hard credit check |
| Required to make an offer on a house | No | No, but it proves you’re a serious buyer with the ability to secure financing |
What is mortgage prequalification?
Mortgage prequalification gives you a basic idea of how much money you could borrow to purchase a house. To get prequalified, you’ll undergo a soft credit check — which won’t affect your credit score — and submit basic information about your finances.
A mortgage prequalification is only a general indication that a lender could approve you for a mortgage if you formally applied. You can usually get a prequalification through a phone call or brief online application.
What is mortgage preapproval?
A mortgage preapproval is a letter specifying your maximum loan amount and interest rate. It states the lender’s commitment to fund the loan if your financial situation remains unchanged.
Obtaining preapproval requires providing extensive documentation regarding your income, savings and debt. You’ll also undergo a hard credit check and report how much you plan to put down on your mortgage, helping the lender calculate your loan-to-value (LTV) ratio.
A mortgage isn’t a done deal until the loan goes through underwriting and the lender confirms the information in your application. If there are discrepancies, your loan terms could be modified, or the lender may deny your application.
Remember, just because you get preapproved or prequalified from one lender, it doesn’t mean you have to actually get a mortgage with them. Always shop around before you make the final call on a lender, because interest rates and terms vary. By shopping with multiple lenders, you can determine if you’re getting the best deal. But do try to submit your preapproval applications within a 45-day period; that way, they get counted as one inquiry on your credit report.
Which should I choose: Preapproval or prequalification?
Preapproval and prequalification have one major thing in common: They’re both indications from a mortgage lender that you’re eligible for a mortgage. But which one you should get depends on where you are in the homebuying process.
You might be ready for preapproval if:
- You’re ready to make an offer on a home in the next few months.
- You have an excellent credit score.
- You have money saved for a down payment.
Prequalification might be a better choice if:
- You’re just starting to look for houses.
- You’re working on boosting your credit score.
- You’re still saving money for a down payment.
Remember that, while neither preapproval or prequalification is a promise, prequalification is less likely to give you a realistic sense of what you can afford. If you’re ready to set a homebuying budget, consider preapproval. And in a market where sellers are likely to get competing offers, an offer that has a preapproval is likely to beat out an offer without one. It’s a safer bet.
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