The terms “prequalified” and “preapproved” are often used interchangeably by mortgage borrowers, but they aren’t quite the same. Prequalifying for a home loan isn’t as involved — it simply gives you an idea of if you’ll qualify for a mortgage, and if so, how much and at what interest rate. Getting preapproved requires more legwork and indicates that the lender is committed to moving forward with the mortgage.
What is a mortgage prequalification?
Mortgage lenders give borrowers the option to see if they are prequalified.
It involves submitting some basic financial information and undergoing a credit check to determine how much house you can afford and possible interest rates you’ll qualify for.
A mortgage prequalification is only a general indication that you could be approved for a mortgage if you were to formally apply. It might be your first step in the homebuying process, and can usually be obtained with a phone call or brief online application. Learn more about the pros and cons of prequalification to see if this step makes sense for you.
What is a mortgage preapproval?
A mortgage preapproval is a letter or written statement that specifies your maximum loan amount and the lender’s commitment to fund the loan if your financial situation remains the same.
To get a mortgage preapproval, you’ll need to submit a formal loan application and provide extensive documentation regarding your income, savings and debt, such as credit cards and student loans. Your mortgage lender uses this information to determine whether to offer you a loan, and at what maximum amount and interest rate.
It’s not set in stone until the loan goes through underwriting and the information in your application is confirmed by the lender. If there are discrepancies, your loan terms could be modified, or the lender might deny your application.
While it’s more complex than prequalification, a preapproval can still be very fast. Some online lenders issue preapproval letters in minutes. Others might require a full day or even a week to review the information you submit.
Regardless of how long it takes, the wait is worth it, since you’ll need a preapproval in hand before making an offer on a home.
“Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns and bank statements,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”
|No formal application required, but might require credit check||Requires formal application and credit check|
|Provides estimate of how much you might be eligible to borrow||Provides conditional loan approval|
|Relatively quick process and rapid response from lender||Could take time to gather documentation and complete application, then anywhere from a few minutes to a few business days for response|
|Not a viable approval, and not used when making an offer on a home||Demonstrates to home sellers you’re a serious buyer and on track to full approval|
Which should I choose: Preapproval or prequalification?
Both preapproval and prequalification are indications from a mortgage lender that you are eligible for a mortgage, but a preapproval is much more detailed — and more of a guarantee.
“Because prequalification may not always lead to loan approval, it is important for homebuyers to avoid making any firm plans based on their qualification status,” McBride says. “If the mortgage lending process were a highway intersection, prequalification would be the yellow traffic light and preapproval would be the green light.”
That green light is important in today’s housing market. Since some markets are especially hot, sellers might be getting competing offers. If they’re comparing one offer without a preapproval letter to an offer that does have one, they’re likely to go with the preapproved buyer — it’s a safer bet.
While there are differences between getting preapproved vs. prequalified, both processes usually involve credit checks. Typically, these are recorded as one inquiry on your credit report if they’re done within a short window, usually 45 days.
Preapproved vs. prequalified FAQ
How to get started
Before you ask a mortgage lender to preapprove you for a certain amount of money, take a look at your budget to determine how much you can contribute to a down payment. Most lenders will want an idea of what you plan to cover to have an estimate of your loan-to-value (LTV) ratio.
Additionally, gather all the documentation that will be requested so you’re ready to hand it over.
Remember, just because you get preapproved or prequalified from one lender, it doesn’t mean you have to actually get your mortgage through that specific lender. Always shop around before you make the final call on a lender, because rates and terms vary. By shopping multiple lenders, you can determine if you’re getting the best deal.