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 the difference between preapproved and prequalified?
Getting prequalified for a loan is easier than receiving a preapproval, which also means prequalification means less to home sellers regarding your ability to get the mortgage.
Prequalifying involves submitting some basic financial info and getting your credit checked to get a general idea of whether you can get a mortgage, how much you could borrow, and the interest rate.
For a preapproval, lenders will do a deeper dive into your financial situation and will require more documentation of the financial details you provide as well as a formal loan application. Preapprovals hold more weight and are more useful when trying to buy a home.
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.
How to get started with the preapproval process
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 with multiple lenders, you can determine if you’re getting the best deal.
Preapproved vs. prequalified FAQ
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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.
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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.
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Because a prequalification is a less detailed process, you can usually get one quicker than a preapproval. It can even happen in a matter of minutes over the phone, or seconds online.However, you can also get a preapproval 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.
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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.
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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.
Source: thesimpledollar.com