As you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval”.
It’s important to understand what these terms mean – they’ll guide your home search and help you focus on homes you can afford. When the time comes, they can also help decide how much to offer and show the seller that you’re a serious buyer.
At the most basic level, prequalification and preapproval are types of mortgage approvals, and they refer to the steps a lender takes to verify that a client can afford a mortgage. In this article, we’ll review some common ways lenders use prequalification and preapproval.
But first, a couple points to remember:
- Every lender handles mortgage approvals differently. The steps and words involved change from lender to lender. Many lenders use prequalification and preapproval interchangeably.
- No matter what type of mortgage approval you get, it’s not a guarantee that you will close the loan.A prequalification or a preapproval is a way for a lender to help you and a seller estimate what you can afford. After you find a house and make an offer, the home will still need to be appraised by a third party and inspected for potential repairs before you can close the loan and buy the home.
What Is Mortgage Prequalification?
A prequalification generally means that a lender collects some basic financial information from you to estimate how much house you can afford.
It’s common for a prequalification to rely on self-reported information, instead of verifying by pulling your credit report or reviewing financial documents. This means a prequalification is typically a ballpark estimate. It also means it is less reliable than a preapproval, which usually involves your lender checking your credit score and reviewing bank statements and other documents.
As you begin searching for a home, real estate agents and sellers want to see you’ve been working with a mortgage lender so they know you can afford to buy a home. After you’ve been prequalified, you’ll usually receive a “prequalification letter” you can show to an agent or seller as proof you’re working with a lender. This is a good first step, but it typically won’t carry as much weight as a preapproval because a lender hasn’t yet verified your information. Going beyond a prequalification and getting preapproved is a critical step to showing you’re serious about buying a home.
What Is Mortgage Preapproval?
Preapproval generally includes some steps to verify the information you provided to get prequalified. Along with pulling your credit report, the lender will likely collect some financial documents from you, like your W-2s, pay stubs, tax returns and bank statements.
Just like with a prequalification, the lender uses this information to see if you’re eligible to get a mortgage. However, since the lender is now working with verified information, they can provide a more accurate picture of what type of a loan you can get and how much house you can afford.
After getting preapproved, it’s common for lenders to give you a “preapproval letter” you can present to real estate agents and sellers showing you can afford to buy a house. Different lenders will have different types of preapproval letters, but it’s common to list how much you’ll be able to borrow and what kind of loan you can get.
Get approved to buy a home.
Prequalification Vs. Preapproval: What’s The Difference?
Both prequalification and preapproval are early steps you can take toward getting a mortgage. They both estimate how much home you can afford, which is a great step to take before you look at houses.
The difference is typically how much of your information the lender verifies:
- Preapproval generally involves the lender verifying your information by reviewing financial documents and your credit history.
- Prequalification relies on information you provide verbally.
This means a preapproval is typically a stronger sign of what you can afford and adds more credibility to your offer than a prequalification.
However, check with your lender to be sure – many lenders use prequalification and preapproval interchangeably, and the process varies from lender to lender.
Why Is Getting Approved For A Mortgage Important?
Getting approval for your mortgage means that a lender has reviewed your financial situation and confirmed your ability to take on mortgage payments.
When you get a mortgage approval, your lender estimates how much you can afford to borrow, what your interest rate could be, and how much your mortgage payments could be. You and your real estate agent can use this information to focus on homes you can afford.
A mortgage approval also proves to sellers that you can afford the home they are selling. Without first securing approval from a lender, the seller might not trust your offer is genuine. Your offer might not be accepted – and even if it is, offering to buy a home without lender approval can slow down your mortgage application.