If you’re shopping for a home, you’ve likely been told that you need to prequalify or get preapproved before you can get a mortgage. While some use these terms interchangeably, these are usually two different steps when applying for a mortgage. This can make it difficult when trying to understand the important differences between them.
Both steps are meant to help give home buyers a realistic idea of how much they can afford when shopping for a home. Prequalification is typically the first, less committal step that uses some information you provide to give you a rough idea of the mortgage amount you could probably qualify for. Preapproval is a conditional mortgage commitment based on verified consumer documentation. A preapproval is usually more valuable because it means the lender has checked your credit and verified your documentation to approve a specific loan amount (usually for a certain amount of time, such as 90 days).
However, what each term means can also depend on which lender you’re talking to. Because of this, you need to be absolutely clear about what your prequalification or preapproval actually means.
Let’s compare preapproval vs. prequalification in depth, then stick around to learn about the Power Buying ProcessSM from Quicken Loans® and how it helps clarify this process with multiple levels of approval.
To get prequalified, you typically need to supply your bank or lender with things like your debt, income, and asset information so they can get an idea of your financial situation. Your lender is then able to give you an estimate of how much you can likely borrow.
Although lenders have varying policies, there are a few things that are common to the prequalification process.
When you apply for prequalification, it can be done online or over the phone and is typically free. You should be able to get a prequalification in less than a day.
You’ll be asked to share information on your income and asset in either verbal or written form. You’ll also share information on current installment debt like car payments and student loans as well as revolving debt like credit cards. If a lender is being thorough, they’ll likely want to verify this last piece by pulling your credit report. In addition to giving them an idea of how much you can afford, having access to your credit scores shows them what loans you might be able to qualify for. For example, an FHA loan has a minimum median FICO® Score of 580, while you need a 620 to qualify for a conventional loan.
By viewing your report, the other thing a lender gets a look at is your total revolving and installment debts. Revolving debts are things like your credit card bills. Meanwhile, installment debts include student, personal and car loans.
Lenders will ask you for verbal verification of any income and assets you plan to use to qualify for the mortgage. By comparing your debts to your income, lenders get something called your debt-to-income ratio (DTI). This lets them determine the monthly payment you can afford, which in turn gives them the maximum price of the house.
Because your income and assets aren’t actually verified for a prequalification, there are a few items to keep in mind.
- The loan amount is merely an estimate at this point because your income and assets aren’t verified in a prequalification.
- Because nothing is verified, for the estimate to be of any use, you’ll want to give the lender information that’s as accurate as possible regarding income, assets and credit.
- Real estate agents and sellers may not look at a prequalified buyer as seriously as someone who has taken the next step to get their information verified – traditionally called preapproval. People feel more comfortable moving forward if they know with certainty that you can afford the offer you’re making.
- Prequalification and preapproval status will be one of the first things sellers and their real estate agents ask you about, so you’ll want to show that you seriously looked into financing at the very least if not had it already lined up.
Does it cost anything to get prequalified?
It depends on the lender. Quicken Loans doesn’t charge for Prequalified Approvals.
How long does it take?
It should take less than a day for a prequalification.
If I get prequalified, does that represent how much I can afford?
Because no info is verified, the prequalification only represents an estimate. The accuracy of this estimate will depend on the accuracy of the information you give the lender verbally or in written form.
The next step is to get preapproved, and it’s usually more involved. If you’re preapproved, it could mean the lender has taken the extra step of verifying your income and assets. This is done by gathering things like your W-2s, tax returns, pay stubs and bank statements.
If the preapproval is a bit weaker, the lender could just mean they pulled your credit and got a verbal estimate of your assets and income.
If your lender has done the right thing by pulling your credit as well as verifying your income and assets, it’s a strong preapproval. This will give a much more definite idea of what you can afford before you go house shopping.
Although your mortgage application isn’t officially completed until you submit a property address to your lender, it’s worth noting that you’ll be submitting much of the documentation for the rest of the application at this point, so make sure you have the paperwork mentioned above readily available to you.
Although Quicken Loans doesn’t charge you to find out how much you can afford, there are sometimes charges associated with preapproval. Ask your lender for details.
Getting a more definite preapproval puts you at a distinct advantage because you’ll know exactly how much you can afford, and then you can shop for homes at or below that price.
Every lender has different policies, but at Quicken Loans, Prequalified Approvals and VerifiedSM Approvals last 90 days.
Prequalified vs. Preapproved: A Brief Summary
|Do I need to fill out a mortgage application||No. No information is verified, beyond possibly credit and debts.
|Yes. This will be completed when you get the property address.|
|Do I have to pay a fee?||Maybe. Ask the lender.
|Maybe. Ask the lender.|
|Will it affect my credit score?||Only if they take this step of pulling your credit rather than relying on your estimate.
|Yes. There will be a credit check.|
|Is it based on a review of my finances?||No.||In a proper preapproval, income and assets are verified.
|How long will it last?||Lender policy varies. At Quicken Loans, 90 days
|Lender policy varies. At Quicken Loans, 90 days|
|Does it require a down payment estimate?||You may get one if they ask about assets.
|Lender will review assets to determine affordability.|
|Will I get an estimated or specific loan amount?||Estimated
|Will I get interest rate info?||Maybe, based on estimated or actual credit score and estimated down payment.||Yes, at the very least, the interest rate will be estimated based on current market rates.|
Does Prequalified or Preapproved Mean Approved?
Prequalification and preapproval both give you a letter from a lender that specifies how much they are likely willing to lend to you based on certain information. These letters are not guaranteed loan offers.
The main advantage of completing both steps before you start your home search is that you’ll get a good idea of what you can actually afford. It also shows you’ve done the legwork to talk to lenders about obtaining mortgage financing which can indicate seriousness. However, as a home buyer, you should know that being prequalified or preapproved – or approved, in the case of Quicken Loans – doesn’t mean you’ve received official mortgage approval. Your income and assets will have to be fully verified by the lender.
Once you’ve made an offer on a home and had it accepted, you’ll submit the purchase agreement to your lender of choice. Once they get the address, your mortgage application is officially complete and you’re moved to the next step of the process in which your income and assets are looked at again during a complete review of your loan file.
Once you find a house, it will have to be appraised to establish its value and make sure it meets basic safety and livability standards.
At this point, you’ll receive a loan commitment from your lender. This may or may not be conditional on the verification of certain other documentation and/or getting issues resolved with the home you’re buying, but you can expect to get a closing day and be well on your way.
As you’ve seen though, not all mortgage approvals are created equal. How can you cut through the clutter and tell the difference?
Our Power Buying Process SM
At Quicken Loans, we have multiple levels of approval in our Power Buying ProcessSM in order to more precisely specify the level of examination your mortgage approval has received. Those levels are:
- Prequalified Approval — We pull your credit and ask for estimates of your income and available assets in order to calculate your DTI, and let you know what you can spend. The best way to think of this is as an estimate.
- Verified ApprovalSM — In addition to a credit pull, you give us income and asset documentation. Your Verified Approval Letter should give you the absolute confidence you need to back up the offer you’re making. If you don’t close based on our review of your documentation, we’ll grant you $1,000.1 This gives your offer strength on par with that of a cash buyer because the seller will know you’re good for the financing.
Learn more about our Power Buying ProcessSM or visit Rocket Mortgage® by Quicken Loans® if you’re ready to start. One of our Home Loan Experts will also be happy to work with you if you give us a call at (800) 785-4788. If you have any questions, you can let us know in the comments below.
1Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply. Verified Approval within 24 hours of receipt of all requested documentation.
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