Are you in the process of buying a home? If so, you've probably heard the terms "mortgage preapproval" and "prequalification." While they may sound similar, they actually have different meanings and implications. Understanding the difference between the two can help you make informed decisions and navigate the homebuying process more effectively.
Obtaining financing is a crucial step in buying a home. It allows you to determine how much you can afford, strengthens your negotiating power, and gives sellers confidence in your ability to secure a loan. However, confusion often arises when it comes to mortgage preapproval and prequalification, as many people use these terms interchangeably.
Knowing the distinction between mortgage preapproval and prequalification is essential for homebuyers. Each has its own requirements and benefits, and understanding the nuances can save you time, money, and potential disappointment. In this article, Benzinga explores the differences between mortgage preapproval vs prequalification, empowering you with the knowledge to make informed decisions throughout your homebuying journey.
Main Differences Between Preapproval and Prequalification
- Preapproval is a rigorous process that involves reviewing your financial information and credit.
- Prequalification is a preliminary estimate of what you might qualify for. You typically self-report information like your income and assets.
- You can submit preapproval letters to strengthen your home offers.
- Prequalification is good for getting a sense of whether you’ll be approved and how much, but they’re not persuasive to home sellers.
- Some lenders use these terms interchangeably, so look at which option you should choose with lenders you’re considering.
What is Preapproval?
Before you apply for a mortgage, you can apply for preapproval or prequalification. Some lenders use the terms preapproval and prequalification interchangeably. Look at how your lender defines these terms before you proceed.
In general, a preapproval is more rigorous than a prequalification. You typically need to complete an application and submit financial documents for the lender to review. Based on the information you provide, the lender will let you know how much you can borrow, your potential interest rate and monthly payment.
The lender will also provide you with a letter that you can submit with home purchase offers. This strengthens your bids and lets the seller know you’re serious about buying a home.
You can ask the lender to customize the letter so it reflects exactly what you’re offering. You don’t want to submit a letter that shows you’ve been approved for more than your offering — the seller might hold out for more.
What is Prequalification?
A prequalification is a preliminary estimate of what you might qualify for. You typically report your income and assets to the lender, and the lender will do a surface-level check of your credit.
A prequalification is useful for checking out different lenders and learning about your chances of getting approved. It’s not something you’d typically want to submit with a home offer, as it doesn’t tell the seller you’re serious — it just says you’ve started the mortgage process.
Preapproval and Prequalification Documents
Here are the documents you’ll need for a preapproval or prequalification.
Mortgage Preapproval Documents
Lenders vary in terms of what they’ll need for preapproval documents. The best approach is to put together a packet so you’re prepared for both preapproval and your eventual mortgage approval. You’ll want to gather:
- Proof of identity like a driver’s license
- Your pay stubs from the past 2 months
- Your W-2s from the past 2 years
- Your tax returns from the past 2 years
- Documentation of any other income sources (child support, alimony, retirement)
- Your 2 most recent statements from all your financial accounts
- Documentation of any recent name changes (marriage certificate, divorce decree, court order)
- Your Social Security number
When you submit your preapproval application, your lender will let you know which documents to submit and how to submit them. Many lenders have an online mortgage process that allows you to upload your documents or securely link your accounts so the lender can access the information it needs.
Preapprovals may take a few days, but some can turn them around more quickly. Factors such as the lender's workload, the complexity of the applicant's financial situation, and the thoroughness of the documentation provided can all impact how quickly the preapproval process is completed.
Pre-approved mortgages typically have a validity period of around 60-90 days. After this time frame, the lender may need to re-evaluate the borrower's financial situation and creditworthiness before finalizing the mortgage.
Mortgage Prequalification Documents
With a prequalification, you may not need to provide any documentation. You’ll need to provide personal information so the lender can confirm who you are and do a credit check. You’ll need to provide your name, date of birth, address and your Social Security number.
Some lenders will tell you whether you’re prequalified within a few minutes, while others might take longer. Once you know whether you’re prequalified, you’ll be more informed about your mortgage options.
Current Interest Rates
Before you prequalify or apply for preapproval, it helps to know current mortgage rates. Here’s what to expect:
| Loan Type | Rate | APR |
|---|---|---|
| 30-year fixed | 6.509% | 6.584% |
| 15-year fixed | 6.03% | 6.162% |
| 7/1 ARM (adjustable rate) | 6.938% | 7.638% |
| 5/1 ARM (adjustable rate) | 6.5% | 7.59% |
The Best Mortgage Lenders
Which lenders should you contact for prequalification or preapproval? Here are Benzinga’s picks:
- Best For:Flexible Mortgage Optionssecurely through Angel Oak Mortgage Solutions's website
Available in: CA, CO, CT, DC, FL, GA, IL, MD, MA, MI, NH, NJ, NY, NC, OH, PA, RI, SC, TN, TX, VA, WA
Mortgage Calculator
Curious about what your mortgage payments will look like? This mortgage calculator can help.
Which is Better?
If you’re ready to go out and put offers on homes, then a preapproval is your best bet. A preapproval is a bigger commitment from the lender and provides you with significantly more information. You’ll learn about what your potential mortgage payments, mortgage rates and how much you can spend on a home.
A preapproval letter is also an essential tool if you’re in a competitive housing market. When you submit a preapproval letter, the home seller knows you’re serious about buying a home and that you can afford the home you’re bidding on. It makes your offer more appealing and makes it more likely that your offer will be chosen.
If you’re not quite ready to shop for a home, a prequalification can work. A prequalification is best for when you’re exploring your options. You’ll get a sense of how much you could be approved for and what your interest rates could be.
It’s important to note that neither option is a sure thing. A preapproval is closer to an official approval than a prequalification, but you’ll still need to go through underwriting once you have an offer accepted on a home.
Next Steps for Home Buyers in the Mortgage Approval Process
Prequalification and preapproval are both steps you take before you start shopping for a home. You don’t have to do either before putting a bid in on a home, but it’s best to get preapproved since it strengthens your offers.
If you’re a first-time home buyer, the mortgage process can be intimidating. Getting prequalified is a low-risk way to know whether you qualify for a mortgage. Preapproval lets you know exactly what you qualify for, but it’s more involved.
Once you’re prequalified and/or preapproved, decide how much you can afford. You might be preapproved for $250,000, but looking at your budget, you feel more comfortable with a $200,000 mortgage. Use your budget to guide how much home you can afford, not the amount you’re approved for.
Once you know how much you can afford, it’s time to start home shopping. This part can be fun, but also really stressful. A good real estate agent can make all the difference. Ideally, you’ll look at a few houses before you make an offer, but sometimes you’ll fall in love with one and make an offer right away. Your agent can help you navigate making an offer and how to respond with a counteroffer if needed.
Once your offer is accepted, you’ll complete your formal mortgage application. If you’re already preapproved, you’re already a step ahead. The lender will order an appraisal, which is when a 3rd-party evaluates the value of your home. Lenders get appraisals to make sure that the amount they’re lending you matches the value of your home.
You’ll also want to order a home inspection. This is when a professional inspects your home and lets you know if there are any defects. Most home offers have a contingency that allows you to pull out of the offer if the inspection uncovers serious defects.
You can also use the results of an inspection to renegotiate the home price. For example, if extensive repairs are needed, the seller might either lower the home price to accommodate the repairs or make the repairs and keep the sales price the same.
Once the lender has the results of the appraisal and does a final review of your finances, you’ll find out whether you’re officially approved. If you are, the next step is your closing meeting. This is when you sign your closing documents. You’ll receive your closing documents at least 3 days before you close, and you should review them carefully.
Look for any changes from your preapproval and anything that you have questions about. Ask your lender about anything that concerns you.
At your closing meeting, you’ll need to bring funds to pay the balance of your down payment and closing costs. You’ll sign several documents, and then the home will be all yours.
If you’re looking into a refinance, the process is similar, but there’s no home inspection. Refinances typically move a bit faster than home purchases. Check out all the Benzinga mortgage content to learn more about the options available to you.
Frequently Asked Questions
Which is better preapproval or prequalification?
Mortgage preapproval is generally considered better as it involves a more thorough evaluation of a borrower’s financial information, including credit history, income, and assets. This provides a more accurate estimate of the loan amount the borrower can qualify for. Mortgage prequalification is a less rigorous process that provides a rough estimate based on self-reported information. While it can give borrowers an idea of their affordability, it may not hold as much weight when it comes to actually securing a loan.
How far in advance should I get pre-approved for a mortgage?
The ideal time to get pre-approved for a mortgage is typically around three to six months before you plan on purchasing a home. This allows you to have a clear understanding of your budget and financial capabilities, as well as gives you enough time to gather all necessary documents and address any potential issues that may arise during the pre-approval process. It’s important to note that pre-approvals typically have an expiration date, so it’s best to time it accordingly with your home buying timeline.
Is there a downside to getting pre-approved for a mortgage?
Yes, there can be a downside to getting pre-approved for a mortgage. One potential downside is that the pre-approval is not a guarantee of obtaining a mortgage. Even if you are pre-approved, the lender can still deny the actual mortgage application based on additional factors or changes in your financial situation. Additionally, getting pre-approved for a mortgage requires a thorough review of your financial history and credit score, which can temporarily lower your credit score. This can potentially impact your ability to secure other forms of credit during the pre-approval process.