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, but they do take place at different parts of your buyer's journey.
The Main Difference
The reason why there's confusion over the terms “prequalified” and “preapproved” is because they do describe similar situations. In both cases, a lender reviews a homebuyer's financials and estimates how much mortgage they can afford. The major differences lie in how the estimate is obtained and considered by the lender.
While prequalification is a rough idea of your expected loan amount, preapproval is more precise. It takes info like W-2s, pay stubs and tax returns into account before providing an estimate. The preapproval then acts as a conditional mortgage commitment for how much the home buyer can expect to borrow.
However, what both terms mean 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.
What Is Prequalification?
Prequalification is quick and cheap, if not free. It can usually be done online or over the phone, and the whole process is often over in less than a day. You typically supply your bank or lender with some basic financial information, and they give you an estimate of how much you can likely borrow.
How Prequalification Works
The accuracy of your prequalification estimate is entirely dependent on the accuracy of the information you give your lender. Typically, you'll be asked to share info on:
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 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 no info is verified, the prequalification only represents an estimate.
When To Get Prequalified
The key distinction of prequalification is how quick and easy it is. Since you supply the information used to create the estimate, however, your lender cannot verify the accuracy of that estimate, so brokers and agents don't often see prequalification as a particularly valuable data point when considering you as a borrower or client.
This means the best use of prequalification is early in your home buying journey. It can help you get started on your budget and find a price range for potential homes before you're ready to commit to the next level of home buying.
What Is Preapproval?
Preapproval is usually more involved than prequalification, but not all lenders preapprove in the same way. You'll need to check to make sure you know all the rules of your specific preapproval process. At Quicken Loans, preapprovals are typically free of charge and remain valid for 90 days. How long a mortgage preapproval lasts can vary by lender.
Generally, if you’re pre-approved, it means 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 might just pull your credit and get a verbal estimate of your assets and income. This is closer to prequalification as we have defined it above, which highlights the importance of making sure you know exactly what your lender means when they use these terms.
When To Get Preapproved
A strong preapproval gives you a much better idea of what kind of house you can afford. Going through preapproval will also make you a more serious home buyer in the eyes of brokers and agents. If you're getting preapproved, you are likely committed to buying and are actively searching the market.
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.
Prequalification And Preapproval Letters
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, but a preapproval letter is a particularly useful document to have if you're serious about putting an offer down on a house.
Essentially, preapproval letters are documents that demonstrate you've gone through the preapproval process. In some cases, a prequalification letter may be enough, but a pre-approval letter is a much stronger indicator of your interest and ability to follow through on an offer.
What Comes Next?
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 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 to 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.
Take A Simple, Easy Path To Your Mortgage
With differences from lender to lender, varying definitions and inconsistent requirements, you've seen that not all mortgage approvals are created equal. Cut through the confusion and clutter with the Power Buying ProcessSM at Quicken Loans®.
We have multiple levels of approval 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 needed for a mortgage preapproval. 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. This gives your offer strength on par with that of a cash buyer because the seller will know you’re good for the financing.