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Key takeaways
- Prequalification is a simple, quick process that provides a general indication whether you would 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 being prequalified and preapproved is that preapprovals hold more weight when trying to buy a home. That’s because they’re based on a more thorough review of your finances, including your recent tax returns, and a hard credit check. By contrast, prequalifications require only self-reported information, like your annual income and credit score range.
| 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 an 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 financial situation.
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.
The 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.
“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.”
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.
Which should I choose: Preapproval or prequalification?
When it comes to preapproval vs. prequalification, they 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.
“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,” says McBride. “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.
FAQ
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No, you’re never required to get prequalified. This step is mainly useful if you’re not sure whether you’d qualify for a mortgage or how much you’d want to spend. If you’re further along in the homebuying process, you can skip straight to preapproval.
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No, you don’t need a prequalification to get preapproved. If you’re ready to buy a home and have all of your documents in order, you can simply proceed with applying for full preapproval rather than prequalification.
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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. Some real estate agents prefer you be preapproved, or at least prequalified, before they start working with you, too.
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