Prequalified Vs. Preapproved: What’s The Difference?
Jamie Johnson6-Minute Read
September 26, 2022
The mortgage process brings with it a lot of confusing terminology. The problem is if you don’t know the terms, you can end up getting something very different from what you wanted. That’s why it’s so important to understand the fundamental difference between being prequalified vs. preapproved.
Prequalified Vs. Preapproved For A Mortgage: An Overview
Prequalification refers to an estimated loan amount that you receive from a mortgage lender after they get verbal or written financial information from you. When you get a preapproval, your mortgage lender decides how much you’ve been approved for and what your interest rate might be after you’ve completed the necessary steps and handed in the right documentation.
Prequalification and preapproval are both types of mortgage approvals, but a preapproval tends to be more accurate. Prequalification is a ballpark estimate based on information that the buyer submits, whereas the information is verified by a lender for a preapproval, making it a more rigorous process.
One crucial distinction is the prequalified amount provided is an estimate, but the preapproval amount is more accurate. Even if you’ve already been prequalified to take out a mortgage, you’ll want to take the extra step to get preapproved before you make an offer on a home.
Differences Between Prequalified And Preapproved
The big difference between prequalification and preapproval is that preapproval is verified and prequalification isn’t. Let’s go just a little deeper on that.
A prequalification involves verbal or written estimates of your income and assets used to qualify for a mortgage. Sometimes the lender will do a credit check, but they may also rely on you to provide that estimate. Based on that information, the lender will give you their best guess as to what your interest rate would be and how much you can afford.
While it happens quickly and is a fairly easy process, the weakness of prequalification is that nothing is verified. So it’s worth about the cost of the paper it’s printed on. With a preapproval, a lender will do a full credit check and have you share documentation. This gives a much more exact interest rate and amount you can afford.
That doesn’t mean that a preapproval is a done deal in terms of mortgage financing. If you were to take out new loans or credit and significantly change your financial profile before you close, it could change the amount you qualify for. However, while preapproval’s not necessarily final, it shows sellers you are serious, and you should have the financial backing to make your offer.
Similarities Between Prequalified And Preapproved
Although they arrive at the answer differently, both a prequalification and preapproval are estimates of what you can afford. Preapproval is just a stronger version because it’s backed by documentation.
What Does Prequalified Mean?
Prequalification is often the first step you’ll take in the home buying process. This can usually be completed online or over the phone, and you can receive prequalification within 24 hours. You’ll receive a prequalification letter once the process is complete.
During the prequalification process, you’ll submit information to your lender about your current financial situation. You’ll let your lender know your income and how much outstanding debt you have.
However, your lender won’t verify this information, and there’s usually no credit check required. You’ll receive an estimate of how much you can borrow along with potential interest rate info, but this isn’t set in stone.
Getting prequalified can help you get a sense of how much you may be able to borrow for a mortgage. However, this number is not definite – it could change once your lender verifies your financial information during the preapproval process.
How To Get A Mortgage Prequalification
There are several steps you’ll need to take to get prequalified for a mortgage. Fortunately, this process is relatively easy to complete.
Find A Mortgage Lender
First, you’ll need to pick a lender or several lenders to apply with. If you get prequalified with multiple mortgage lenders, you can compare your offers and see who provides you the best terms.
Discuss Financial Situation
Your lender will need information about your debt, income and assets to provide you with a mortgage estimate. To make this process easier, it helps to have any necessary documentation on hand when you apply. The more accurate the information you provide, the more accurate your mortgage estimate will be.
Get An Estimate
Next, your lender will provide a ballpark estimate of the loan amount you may qualify for. However, this is not a guarantee that you’ll be approved for a loan, but rather a loose guideline as to what you can afford. Once you receive your estimate, a preapproval is your next step in the home buying process.
Request Prequalification Letter
And finally, you should request a prequalification letter that you can show your real estate agent. It will summarize everything you and your lender have discussed up until this point. Although there’s nothing official about it, it does allow your agent to determine the starting point when helping you look for homes in your price range.
Of course, if you are serious about buying, it might be best just to start with a preapproval.
What Does Preapproved Mean?
Once you’re prequalified for a mortgage, preapproval is the next step you’ll take. This process is typically more rigorous because the lender will verify the information you provided. Since this is the kind of letter that sellers tend to take more seriously, those looking to move quickly can just skip prequalification and go directly to preapproval.
During this stage, you’ll fill out an official mortgage application. You’ll also provide your lender with any necessary financial documents, including bank statements, W-2s, pay stubs and tax returns.
Your lender will review this information and check your credit history. Once the underwriting process is complete, your lender will tell you how much money you’re preapproved for. At this point, you may also be able to temporarily lock in an interest rate.
How To Get A Mortgage Preapproval
Preapproval is a much more in-depth process – here are the steps you’ll take to get preapproved for a mortgage.
Complete Mortgage Application
Unlike a prequalification, getting preapproval for a mortgage requires you to complete an application, which may also include paying an application fee. You should also be prepared to let your lender know how much you’re willing to put toward a down payment and reserves. Reserves are the number of mortgage payments you could cover if you lose income.
Provide Necessary Documentation
During the preapproval process, you must provide your lender with the documentation needed about your financial situation to determine how much you can borrow. Here is some of the information you can expect to be requested:
- Credit score and report
- Pay stubs
- Bank statements
- Tax returns
- Driver’s license
- Proof of employment
- Gift letters (if applicable)
Determine Estimate And Rate
Once you’re preapproved for a mortgage, you’ll receive a more accurate approval amount and interest rate. Make sure you understand your estimated interest rate since this will affect what you’ll end up paying over the life of the loan.
Get Preapproval Letter
The final step in getting preapproved is to receive a preapproval letter. This letter will explain how much you’ve been approved to borrow and what your interest rate might be.
A preapproval letter is more significant than a prequalification letter alone. Showing this letter to a seller indicates that you’re a serious buyer. This makes it one of the most important steps in the home buying process.
Why Is It Important To Get A Mortgage Prequalification Or Preapproval?
If you’re looking for a home, it’s important to get prequalified and preapproved for a mortgage. In particular, getting preapproved is essential in a seller’s market with more competition for a home. A preapproval letter makes it more likely that your offer will be accepted.
Many sellers and their real estate agents won’t consider an offer that hasn’t had a verified preapproval. It’s really an essential if you’re buying a house.
The Bottom Line
Although prequalification and preapproval may sound similar, they mean two very different things when it comes to your mortgage process. While they’re both estimates of how much home you can afford, a prequalification essentially relies on verbal or written estimates for credit, income and assets. A preapproval is better because it’s backed up by documentation.
While a prequalification can be a good start if you’re just trying to determine exactly what you can afford, many sellers and real estate agents only consider offers based on preapprovals with documentation. If you feel like you’re ready to move forward, you can apply for a mortgage loan from our friends at Rocket Mortgage®. You can also call them at (833) 326-6020.
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