Mortgages 101: Prequalification Vs. Preapproval

Prequalification

Prequalification gives you a ballpark estimate of how much you may be able to borrow toward your new home. The process is simple, it’s usually free of cost, and it can be completed online or over the phone. You provide the lender with information about your finances, such as income, assets, and debts. Note that all of this information is self-reported by you, the potential borrower. The lender does not typically verify your information, nor do they pull your credit report at this time. Your prequalification gives you a general idea of what type of house you can likely afford.

Preapproval

Preapproval gives you an amount you can expect to have offered to you as a home loan. It requires an in-depth analysis of your financial stability and creditworthiness.

When you go through the preapproval process, you’ll fill out a formal application. You’ll provide the lender with documents like W-2s, pay stubs, a summary of monthly expenses, and lists of your current assets. The lender will also check your credit report.

Ideally, you’ve planned ahead and are going through the preapproval process before finding the house of your dreams, and if so you’ll leave the “property” section or sections of the application blank for now.

After a successful preapproval process, the lender should give you a “preapproval letter.”

Note that preapproval is NOT an official loan offer. Other steps are still to come before the official loan commitment. Also remember that if your credit or finances change after you are preapproved, your preapproval could be in jeopardy.

Your preapproval letter is your leverage in the homebuying game.

Why Preapproval Is What Matters More

Your preapproval letter is your leverage in the homebuying game. When you find the home that’s right for you, you show this letter to the seller, or to the seller’s agent. This is your proof that you’re a serious buyer and that you have your finances in order to complete the deal. In fact, many agents may not consider an offer without an accompanying preapproval letter.

Prequalification, on the other hand, does not carry the same weight.

Especially in a competitive market, having that preapproval letter in hand could mean the difference between moving into your dream home or losing out to another buyer who was more prepared than you were.

So Should I Even Bother With Prequalification?

You don’t have to. If you’re serious about buying a new home soon, it may be wise to skip straight ahead to the preapproval letter.

Prequalification is an option for potential homebuyers who are still just considering the possibilities. Maybe you’re in the “window shopping” phase of homebuying, and you want a general idea of what price ranges will be within your budget. Going through the prequalification process also gives you a chance to sit down with a lender to discuss your goals and options, without the more stringent requirements of getting preapproved just yet.

If you're wondering how the entire process of buying a home works, read our Complete Guide to Homebuying on a Budget. This invaluable resource offers everything you need to know about buying a home, from setting your budget to move-in day.