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Pre-Approved or Pre-Qualified for a Mortgage: Which One Is Better?
One of the best ways to make your offer more attractive when buying a house is to come prepared with either a preapproval or prequalification letter. Doing this shows the seller that you aren’t just interested in buying the home — you’ve also got the financial backing to do so.
Being preapproved and prequalified for a mortgage gives you an idea of how much you can spend on a house and show sellers that mortgage lenders are willing to loan you the money for the home.
But while the purpose of prequalification and preapproval are similar, the two aren’t quite the same. Preapproval requires providing more information to a lender and shows you to be a more creditworthy buyer, and there are other differences worth noting, too.
What is a prequalification on a mortgage?
Prequalification is one of the first steps in the homebuying process. Unlike preapproval, which requires providing detailed financial information, prequalification is just a snapshot of your overall financial picture. Prospective lenders will look at your overall financial situation, including income and existing debt.
The process for prequalification typically won’t require you to provide detailed financial records or undergo a credit check. It can take anywhere from a few minutes to a few days to complete the prequalification process, though the actual timeline will depend on the lender.
Using the information you provide, a lender will give you an estimate of how much you can borrow. Prequalification is a useful tool early in the homebuying process, as it can help guide buyers to homes within the right price range. It also sends a positive signal to realtors and sellers that you are on track to get funding for the home. They may be more willing to work with you and consider your offer since a lender has deemed you creditworthy, at least based on the most basic information.
However, it’s important to note that prequalifications are preliminary, and there’s nothing to guarantee a lender will actually give you that amount. Because the prequalification process doesn’t necessarily require a credit check or concrete financial records, lenders may change their tune if the information you initially provided doesn’t entirely align with what your documents show. For that reason, a prequalification letter isn’t likely to carry quite as much weight with sellers.
What is a preapproval on a mortgage?
A mortgage preapproval is the process a lender requires of a borrower to help decide whether to extend a mortgage loan and determine how much it’s willing to lend. Think of preapproval as the next step in the mortgage process after prequalification — it requires that you provide more financial information to the lender but results in a more definitive determination of your creditworthiness.
To secure mortgage preapproval, you’ll likely need to provide the following information:
- Proof of income and employment in the form of paystubs for the past 30 days
- W-2s and tax returns for the past two years
- Proof of assets in the form of bank statements
- Proof of creditworthiness in the form of a credit check
Because it requires more fact-checking on the lender’s part, preapproval takes a bit longer than prequalification. While prequalification can be completed on the same day, preapproval can take anywhere from a few days to a few weeks, depending on the lender and the information you’ve provided.
Preapproval letters are typically good for a particular number of days. For example, a lender might promise to honor the preapproval as long as you buy a home within 90 days. As a result, it’s best to secure your preapproval letter further along in the process or when you’re ready to actually buy a house.
What’s the difference?
Mortgage preapproval and prequalification are similar, but they require different information, and people are likely to do them at different steps during the homebuying process.
You’ll need different information for a mortgage preapproval vs. prequalification. Getting prequalified doesn’t require much documentation. You’ll tell the lender about your income, debt and assets. It’s all self-reported — and they probably won’t verify the information or run a credit check.
Preapproval, on the other hand, requires a lot more information. Your lender will ask for pay stubs and tax returns to verify your income and employment. The lender may also contact your employer. You’ll also need to provide proof of your assets in the form of bank statements. Finally, the lender will run a credit check.
Prequalification and preapproval can show a seller that you’re serious about buying, but preapproval carries more weight. Prequalification doesn’t require a lender to verify all of the information, so it’s easier to prove to the seller that you can get a loan if you offer a preapproval instead.
You can seek prequalification at any time. Even if you aren’t planning on buying a home for a year or two, you can use a prequalification to get an idea of the budget you should stay within. Preapproval letters are typically only guaranteed for 60 to 90 days, meaning you should wait until you’re ready to buy to complete the process.
Which one should you go for?
Prequalification and preapproval can both be valuable tools in helping you to determine how much house you can buy. They also signal to home sellers that you’re able to secure financing from a lender. Ultimately, they are appropriate for two different situations.
Prequalification is perfect for those who are just starting the buying process. Buyers who are just getting started may be unsure of how much home they can afford. Prequalification can help them to set parameters in the home search.
Realtors may ask their clients to get prequalification. This helps them help you better and shows them that you really intend to make a purchase. If you find that perfect home, your prequalification letter can help give your offer some weight.
Preapproval is a better move for those who are further along in the buying process. You might seek preapproval if you’ve done your preliminary shopping, have a specific budget in mind and feel ready to make a purchase.
If you expect to buy a home quickly, you can skip the prequalification process and go straight for preapproval. It’s important not to get pre-approved too early in the process since lenders typically only guarantee preapproval letters for 60 to 90 days.
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