Getting a mortgage can be complicated and time-consuming, but you have the power to reduce some of the stress and speed up the process by getting preapproved or prequalified. Here’s a rundown of how each of these processes work, and what they mean with respect to your buying power.
What is a mortgage preapproval?
A mortgage preapproval requires submitting a formal loan application and providing 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.
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.”
What is a mortgage prequalification?
Mortgage lenders also give borrowers the option to see if they are prequalified, which is only a general indication that you could be approved for a mortgage if you were to formally apply. A prequalification might be your first step in the homebuying process, and can 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.
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.
FAQs about getting preapproved vs. prequalified
1. Why is getting approved for a mortgage important?
If you can’t afford to make a cash offer on a home, you’re going to need to borrow money in the form of a mortgage to make the dream of owning a home a reality. A mortgage lender needs to review your finances and sign off on approving your loan before you’ll get the keys.
2. What information do I need to provide to get preapproved or prequalified?
To get prequalified for a mortgage, you’ll usually only need to provide high-level financial information like basics about your income and expenses, without any supporting documentation.
For preapproval, however, you’ll need to fill out a more formal application and provide documents that serve as evidence: recent pay stubs from your employer, bank and credit card statements, W-2 tax statements and anything else that shows a complete picture of your personal finances.
3. How long does a preapproval or prequalification take?
Because a prequalification is a less detailed process, it can usually happen more quickly than a preapproval. It can even happen in a matter of minutes over the phone, or seconds online.
However, preapprovals can also happen quite fast. Some lenders promise preapproval letters with turnarounds of just a few minutes. Others, though, might take a few days to get back to you. If your financial situation is more complicated — if you’re self-employed, for example, or have another reason for a deeper investigation — the preapproval will likely take a bit longer.
4. When is the best time to get preapproved or prequalified for a mortgage?
You should get preapproved or prequalified before you begin looking at homes. A seller will want the assurance that you’ve done the prep work — and that a bank or credit union has done enough research to feel confident about loaning you the money.
5. Can I skip prequalification and get preapproved?
Yes. There is no requirement to get prequalified first. Instead, jumping ahead to preapproval speeds up the process and puts you closer to being fully approved.
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.