If you’ve researched applying for a mortgage, you’ve probably come across the terms “prequalified” and “preapproved.” Both are important steps as you get ready to apply for a home loan, and there are some key differences between the two that are important to understand.
Side by Side: Mortgage Prequalification vs. Prapproval
| Feature | Prequalification | Preapproval |
| Application Required | No | Yes |
| Application Fee | No | May be required |
| Credit Check | Soft Inquiry (no impact) | Hard Inquiry (impacts score) |
| Financial Review | Basic Self-Reported Info | In-Depth Verification |
| Down Payment Estimate | No | Yes |
| Loan Amount Estimate | Yes (Rough Estimate) | No |
| Specific Loan Amount | No | Yes |
| Interest Rate Information | No | Yes |
Preapproved vs. Prequalified: What’s the Difference?
If it’s your first time navigating the homebuying process, you may think that prequalification and preapproval are interchangeable. However, the reality is that the preapproval process is more involved. Both of these steps will help you figure out what you can afford, but a preapproval goes further by verifying your financial information. The result is a more accurate estimate of the loan that you will qualify for.
Securing a preapproval letter lets the seller know that you are a serious buyer. “It’s important to show the seller and listing agent that you are serious about moving forward,” says Tom Pessemier, mortgage broker with the Pessemier Team at Edge Home Finance. “In the environment we are in now with the lack of inventory in the housing market, buyers really have to put their best foot forward.”
Mortgage Prequalification: What it Is and How it Works
Getting prequalified provides a rough estimate of what you might be able to borrow for a mortgage loan. If you’ve been saving for a house, a prequalification will give you a general idea of how much you’ll be approved for, which will help you determine your down payment and closing costs.
The mortgage lender will request basic financial information. You’ll need to disclose your income and any additional assets. They’ll review these details and check your credit to confirm that you’re likely to make your mortgage payments in a timely manner. The credit check that’s performed for a prequalification is known as a “soft inquiry” and will not impact your credit scores.
After you’re prequalified, the lender will get back to you with a general estimate for different mortgage options and a prequalification letter that you can show to sellers and real estate agents.
Benefits of Getting Prequalified
When you prequalify for a home loan, you’ve taken a step that will allow you to:
- Shop mortgage rates with different lenders.
- Estimate and set a home-buying budget.
- Gauge your buying power without an inquiry into your credit history.
- Address any financial concerns before you get preapproved.
- Have a mortgage lender ready when you’ve decided to make an offer.
Limitations of Prequalification
Getting prequalified is a great way to prepare for buying a home, as it will provide an indication of what you can afford. However, if you’re actively reviewing real estate listings and getting ready to make an offer, you’ll want to get preapproved to expedite the home-buying process.
Mortgage Preapproval: Taking the Next Step
When you get preapproved for a mortgage, you will fill out an application and send your lender multiple documents to verify your financial standing. The items that you’ll submit may include your driver’s license or other form of identification, as well as your tax returns and documents that show proof of income. The lender will review these documents and pull your credit report to estimate the loan amount and interest rates that you will qualify for. After your information is verified, you will receive a preapproval letter that indicates how much you can borrow and what your interest rate will be.
A preapproval provides proof that you’ve secured your financing. This is a positive signal for sellers, especially in a competitive market, since it indicates that you are ready to complete the sale if you submit an offer and go under contract.
Advantages of Being Preapproved
These are the main reasons why it’s a good idea to get preapproved before you make an offer on a house:
- You will know what you can afford and what the terms of your loan will be.
- Real estate agents and sellers prefer working with buyers who have taken steps to secure their financing. A preapproval indicates that your personal finances are in order.
- Your loan will be processed more quickly because most of your financial information is already in the lender’s system.
Documentation Needed for Preapproval
To determine the loan amount you’ll be approved for, lenders require several documents to verify your income, assets and any debt. These could include:
- Your social security card and a valid form of identification, such as your driver’s license or passport.
- Pay stubs and tax documents, including W-2 forms and tax returns.
- Statements for your bank accounts, investment accounts and retirement accounts, such as 401(k) and IRA accounts.
- A detailed list of your debts, including student loans, car loans and credit card statements.
Frequently Asked Questions: Prequalified vs. Preapproved
Do I need a down payment to get approved? You will not get approved for a conventional loan without at least a 3% down payment. Similarly, FHA loans require a minimum of 3.5% down with a credit score of at least 580. If you qualify for a VA or USDA loan, you can secure financing without a down payment. VA loans are reserved for veterans and members of the military; buyers in rural areas may be eligible for USDA loans.
Does prequalification hurt my credit score? Unlike a preapproval, prequalification involves a “soft inquiry” into your credit and will not impact your credit score.
Does prequalified mean you will be approved? No, being prequalified does not guarantee that you will be approved for a home loan. A prequalification indicates that you meet some of the criteria for a loan, based on the review of the financial information that you submit to a lender.
How long does prequalification or preapproval last? You can typically expect a prequalification or preapproval letter to be good for 60 to 90 days, or as little as 30 days with some lenders. Preapprovals expire because they are based on your financial standing at a specific time; that information can change over the course of a few months.
What does prequalification mean? Getting prequalified gives you a general idea of the mortgage loan that you can secure. The lender will give you a rough estimate after a soft inquiry into your credit and a review of the basic financial information that you provide.
What if my financial situation changes after I get preapproved? Changing jobs, taking a pay cut, or becoming self-employed can impact your mortgage approval, even if you’ve been preapproved. Lenders base their decisions on your current financial standing, including income and employment. If anything changes you must talk to your lender to ensure that you’ll still qualify for the loan.