The mortgage process can be complicated and lengthy. Potential homeowners who are preapproved or prequalified for a mortgage often have an advantage that can speed up the lending process and help beat out other buyers bidding on the same home.
Getting preapproved for a mortgage means you might have leverage negotiating with a seller since the owner knows that you are more likely to have a loan approved. A prequalification is a step short of a preapproval, but it has own advantages. Here’s how each one works.
What is a mortgage preapproval?
When a borrower is preapproved for a mortgage, it means a lender has reviewed his or her credit and has approved the individual for a specific mortgage loan amount, says Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.
Preapproval is a more complex process that requires submitting a formal loan application and providing extensive documentation regarding your savings and other debt such as credit cards and student loans. The lender uses this information to determine whether to offer you a loan, and at what maximum amount and interest rate.
“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, 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 apply. It’s typically the first step in the homebuying process and can be completed with a phone call or online application with financial information that you provide.
Mortgage prequalification is less formal and only serves as an estimate of how much you may be able to borrow based on your income and budget, says McBride.
“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.”
Mortgage preapproval vs. 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 takes less of your own financial picture into account, you’ll still have to provide more paperwork and go through a more extensive process before you can get your mortgage. With preapproval, you’ll already have some of the terms of the loan you’ll qualify for laid out, and backing from the lender to get the money they’ve signed off on.
Be aware that both processes usually involve credit checks, which can affect your credit score. Typically, these are recorded as one inquiry if they’re done within a short window, usually 45 days.
Frequently asked questions about mortgage preapproval and prequalification
1. When is the best time to get preapproved or prequalified for a mortgage?
When you’re ready to buy a home, the sooner, the better. Getting your mortgage in order can be a time-consuming process, and you don’t want to lose your bid on a home because your financing hasn’t been approved. Ideally, you’d have your mortgage preapproved before you even start looking for a home, or at least before you make an offer.
Additionally, having mortgage preapproval in-hand shows a seller you’re a serious buyer, and could compel them to give your offer a closer look.
2. How long does a preapproval or prequalification take?
Because prequalification is a less complex process, it usually happens more quickly than preapproval — it can even happen in a matter of minutes over the phone or seconds online. Preapproval normally takes a few days, though it’s possible to get approved in a single business day in some cases. If your finances require more investigation on the lender’s part, the process can stretch longer, as well.
3. What information do I need to provide to get preapproved or prequalified?
To get prequalified for a mortgage, you’ll likely 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 like pay stubs, bank and credit card statements, tax returns and ID.
4. Which one should I get: preapproval or prequalification?
It depends on how serious you are about buying a home, and how quickly you want to move. If you’re casually looking at houses but not necessarily planning to make an offer, prequalification will suit you fine. If you’re ready to take the plunge and want to move quickly on buying a new home, especially if you’re in a competitive market, you’ll be better served by getting preapproved for a mortgage before you start your search.
5. Can I skip prequalification and get preapproved?
Yes. Because these are two separate processes, you don’t necessarily need to be prequalified to get preapproved. Talk to your real estate agent or mortgage loan officer about which option is best for your situation.
6. What is a certified homebuyer and how do I become one?
If you want to go one step further than getting preapproved for a mortgage, you can become a certified homebuyer. This involves all the steps of mortgage preapproval, plus an underwriter will review your application and conditionally approve you for financing before your offer is submitted.
7. Why is getting approved for a mortgage important?
Simply put, if you need financing to buy a home, you won’t be able to go through with the purchase unless you’re approved for a mortgage. The bank needs to sign off and make the funds available to you before you can close on the home.
How to get started
Prequalification and preapproval are key steps in obtaining a mortgage. Prequalification is a good way to start, since the process only gauges your financial situation and gives you a rough idea of how much house you can likely purchase.
Borrowers who are preapproved will also be given an offer for a loan of a specific amount, helping to jumpstart their search for the right home.
“Preapproval gives you a leg up in the homebuying process because the home seller has a greater degree of confidence that you’ll get approved for your mortgage and the sale will go through,” McBride says. “Telling a home seller that you’re prequalified doesn’t tell them very much.”
Either a preapproval or prequalification can serve as a guidepost in the search for the right home by establishing the boundaries for the purchase price, McClary says.
“While it’s up to each prospective homeowner to determine exactly what they can afford within or below that range, having an idea of how much can be borrowed can be a good starting place for arriving at an acceptable price range,” McClary says. “A preapproval is beneficial for borrowers because it streamlines the rest of the lending process, leaving fewer steps between decision and closing.”
Always shop around before you pick a lender even if you are preapproved or prequalified for a mortgage, because rates and terms can vary, and only by shopping multiple lenders can you determine if you’re getting the best deal.