Young couple and real estate agent looking at contract

Mortgage Preapproval vs. Prequalification

tl;dr

What You Need To Know

  • Preapproval and prequalification are different ways of learning what you can borrow from a mortgage lender
  • Getting prequalified for a mortgage can be a quick way to find out how much you can borrow
  • Mortgage preapprovals carry more weight with sellers, but they require more paperwork and take longer to get approved

Contents

When you get a mortgage loan, you’re committing to a relationship with a lender that can last 30 years or longer. And that’s a long time – certainly longer than all of Kim Kardashian and Brad Pitt’s marriages combined!

So, if you’re looking for a mortgage lender, don’t rush into a long-term commitment without exploring your options and “playing the field.” Mortgage preapprovals and prequalifications can help you narrow the candidate pool and find “the one.”

Understanding what these terms bring (and don’t bring) to the table, will let you know when it’s time to bow out and when it’s time to put a ring on it.

Mortgage Prequalification: The Flirtation

Prequalification is a quick way to find out how much house a lender thinks you can afford. 

Think of it as stage one in the four stages of dating. A prequalification is the meet for coffee, flirt at a party, trade digits, swipe-right stage of the mortgage application process.

The lender will ask you to share your credit score and some basic information about your income and finances. In some cases, the lender might check your credit with a soft inquiry or “pull.” (It’s free, and your credit won’t be affected.) 

Either way, it’s a quick, informal look at your credit and financial situation that allows the lender to give you a loan estimate – not a guarantee. 

Your prequalification letter will include the loan estimate and the types of mortgages you can get.

Best of all: It’s commitment-free. Just a borrower testing the lender waters.

Mortgage Preapproval: The Dating Game

Mortgage preapproval is far more involved – but its estimate is far more accurate. If prequalification is stage one of dating, getting a preapproval is stage two, possibly three.

A lender will review and verify your financial information and perform a hard pull of your credit report. (A hard inquiry will trigger a small, temporary credit score drop.)

Prospective borrowers will have to answer lots of lender questions:

  • Where do you work?
  • How much do you make?
  • How much do you owe?
  • Where do you live?
  • Are there any relatives who can help you with the down payment or co-sign the loan?

The lender will use all of this information to decide if they’re interested in starting a serious relationship with you.

If it’s a yes, the lender will give you a preapproval letter. Like the prequalification letter, the preapproval is an estimate, but because of the thorough review of your finances, it’s a more accurate prediction. 

The letter lets you and home sellers know how much the lender is willing to lend you. It also includes the interest rate and mortgage terms the lender can offer.

Having this letter will give you an advantage when you’re making offers on homes.

Prequalification vs. Preapproval: A Side-by-Side Comparison

Here’s a quick overview of what most lenders will ask for.

Prequalification
(Information required)
Preapproval
(Information required)
Credit checkEstimated based on information you provide and/or soft pull of your credit report

Provides the lender with your credit score and a general overview of current debts
Hard credit check required

Provides the lender with your credit score and a detailed overview of current debts, like credit cards, student loans and auto loans 
Proof of income and assetsNot required (or self-reported by borrower)Copies of pay stubs or other documents showing a minimum of 30 days of income
Bank, Roth IRA, 401(k) and 2 months’ worth of investment statements
Tax informationNot requiredW-2 statements or tax returns from the past two years
Application feeNot requiredMay be required
Estimated down paymentNot requiredRequired (you must indicate how much money you can offer for the down payment)

With a prequalification, you can get a letter within 1 – 3 days of applying. Preapprovals take longer to get back. You’ll have to wait 7 – 10 days for the letter. 

A mortgage preapproval normally lasts 60 – 90 days. Once it’s expired, you may need to reapply for another preapproval.

Reasons To Get Prequalified: Testing the Waters

In the early stages of the home buying process, you may not feel ready to commit to a lender. But when you’re ready to see what’s out there, getting prequalified can help you commit.

  • Self-assessment: Prequalification isn’t a final offer, but it can give you a sense of how much you can afford to borrow for a home.
  • Compare lender offers: If you’re researching lenders, prequalification is a good way to do some comparison shopping before you commit to a lender or a loan type.
  • Strengthen your negotiating position: If you’re seriously considering a particular lender, having a few prequalifying letters in hand may help strengthen your negotiating position. It’s a signal to the lender that other lenders are interested in working with you as well.

Reasons To Get Preapproved: A Serious Commitment

If you’re ready to start house hunting and have a good idea which lender you want to work with, you’ll want to get preapproved.

It will take more time, but it’s worth it to take the extra steps before you start making serious offers on homes.

  • Know what terms you can get: Preapproval isn’t a final mortgage approval, but it will be closer to the final lender offer than a prequalification.
  • Show sellers you’re serious: A preapproval letter is often necessary to make an offer on a home. Sellers want to work with buyers who’ve already been vetted by a lender, especially in a hot real estate market where sellers may be choosing between lots of offers.
  • Lock in your interest rate: Another benefit of preapproval is that your lender may be willing to lock in your interest rate during the approval period. This can save you money if you expect interest rates to go up in the near future.

Just remember that each preapproval you apply for will require a hard credit pull that shows up on your credit report. These inquiries can impact your credit score, so too many of them spread out over time could put a dent in your score. 

If you plan on getting multiple preapprovals, try to keep them within 14 days of each other, as multiple hard inquiries done close together are only treated as one hard pull on your credit report. It won’t hurt you in the long run, but too many pulls over time can make it harder for you to get final approval for your mortgage if your credit score takes a hit.

If you have multiple pulls in a 1 to 2-week period, it will only register as one pull on your credit report. So it’s a good idea to submit your applications around the same time.

Preapproval or Prequalification: Choose Wisely

Becoming a homeowner is a commitment.

Prequalification is quick, easy and commitment-free. But if you want to get serious with a lender – and make home offers that will be taken seriously by home sellers – you’ll want to get preapproved.

#icymi

In Case You Missed It

Take-aways

  1. Both a preapproval letter and a prequalification letter can help you get a sense of how much home you can afford
  2. Applying for mortgage preapproval requires a hard pull on your credit report, which can temporarily lower your credit score
  3. Getting a couple of prequalification letters can give you leverage when negotiating with a mortgage lender

You Should Also Check Out…