Mortgage Preapprovals Vs. Prequalifications: Which Should You Get?
Victoria Araj6-minute read
November 11, 2023
As you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval.” It’s essential 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 you decide how much to offer and show the seller that you’re a serious buyer.
In this article, we’ll review some common ways lenders use prequalification and preapproval. We’ll also explain how lenders typically handle approvals, so you can know what to expect when you apply for a mortgage.
Every Lender Is Different
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. Here are a couple of 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 although they’ve meant fundamentally different things traditionally.
- Neither is a guarantee that you’ll close the loan. Prequalification or 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 on the loan and buy the home.
At Rocket Mortgage®, we make the approval process as seamless as possible. You’ll quickly get feedback on your options and eligibility when you apply, and you can complete the entire process online.
What’s A Mortgage Prequalification?
A prequalification generally means that a mortgage lender collects some basic financial information from you to estimate how much house you can afford. Getting confirmation from a lender that you prequalify for a home loan allows you to have a general idea of how much you’ll be approved for when it comes time for closing. This makes it easier to set a home buying budget and helps you narrow down how much you should spend on a home.
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 being prequalified for a mortgage typically leaves you with a ballpark estimate rather than a firm number. It also means it’s less reliable than a preapproval, which usually involves your lender checking your credit score and reviewing bank statements and other documents.
Prequalification Letters Help You Start House Hunting
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 by a loan officer is a critical step to showing you’re serious about buying a home.
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Mortgage Preapproval Vs. Prequalification: What To Expect When You Apply
Both prequalification and preapproval provide borrowers with an estimation of how much home they can afford. However, a mortgage preapproval is a more official step that requires the lender to verify your financial information and credit history.Documents required for a preapproval may include pay stubs, tax returns and even your Social Security card.
This means a preapproval is a stronger sign of what you can afford and adds more credibility to your offer than a prequalification. This will also allow you to show sellers a preapproval letter to demonstrate that your financial information has been verified and you can afford a mortgage. However, check with your lender to be sure.
Lenders typically offer a few levels of approval designed to give you a clearer picture of what you can afford:
With prequalification, lenders pull your credit and ask you some questions about your income and assets. Then, they’ll estimate what you can afford. By checking your credit score, the prequalification can be more accurate than a standard prequalification that doesn’t involve this step.
If you’re eligible for a mortgage, your lender will issue you a prequalification letter.
After you’ve been prequalified for a mortgage, you can then pursue a mortgage preapproval. You’ll want to speak to a home loan expert and provide some documentation so they can verify your income and assets.
Because your lender is verifying your income and assets along with your credit history, a mortgage preapproval is a more accurate estimate of what you can afford. It also carries more weight with a real estate agent and the seller, because they’ll know your lender verified that you can afford the home you wish to buy.
Once you get approved, your lender will issue you an approval letter. You can show this to your real estate agent and the sellers as proof that you can obtain a large enough mortgage to purchase the home.
Remember, both prequalifications and preapprovals are estimates to help guide your home search. After you make an offer on a house, your full mortgage approval will depend on the home being appraised by a third party and passing any required inspections.
Which Should You Apply For?
For most serious home buyers, getting preapproved for a mortgage is the best option. The preapproval will give you a more accurate estimate of how much home you can afford so you can better narrow down your search for your dream home. A mortgage preapproval will tell you what types of interest rates you can expect to pay on your loan and which types of mortgages you’ll qualify for. Even better, they give you more bargaining power with sellers as they won’t have to worry as much about your loan not being approved.
Prequalifications, however, can be a good option if you’re just starting to look at properties and aren’t completely sure you’re ready to buy. The prequalification process doesn’t involve a credit check, so your credit score won’t see a temporary dip. It’s ideal if you’re trying to establish a budget or want to explore your loan options. While they won’t give you an idea of the interest rate or a more exact loan amount that you’ll likely qualify for, they can give you a loose estimate to help you figure out if buying a home is feasible based on your location and your income.
Prequalification Vs. Preapproval FAQs
Here are a few frequently asked questions to help you make the right choice between a mortgage prequalification and a mortgage preapproval.
Are prequalifications and preapprovals the same thing?
No. Prequalifications allow you to get a rough estimate of how much of a mortgage you may qualify for without you having to undergo a credit check or extensive review of your financial situation. Preapprovals give you a firmer estimate and let you know the possible interest rates and loan amounts you’ll qualify for based on your credit score and your finances.
Do I have to get prequalified to start looking at homes?
Getting prequalified is a great way to figure out your home buying budget, but it’s not a requirement. You should be able to look at homes without going through the prequalification process.
Do I need to be prequalified before I can be preapproved for a loan?
No. You can start the preapproval process immediately. This is ideal if you know you’re ready to buy a home and want to be able to make qualified offers immediately.
The Bottom Line
A mortgage prequalification is a good way to get an estimate of how much home you can afford, and a preapproval takes it one step further by verifying the financial information you submit to get a more accurate amount. Getting approved early in your home search is a great way to know what you can afford, so you can narrow in on your dream house and stand out to sellers as a preapproved buyer.
Ready to start your home buying journey with confidence? To get started, apply online with Rocket Mortgage.
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