REGION – Prequalification and preapproval are two terms you may hear used interchangeably when shopping for a mortgage, but they are actually two optional steps you can take to start the loan approval process. A mortgage prequalification is usually a much shorter process that requires you to honestly report your own financial information, while a mortgage preapproval typically requires you to submit more documentation, like W-2s, to verify your income and assets, making it a lengthier process.
Neither prequalification nor preapproval will guarantee you a loan, but getting prequalified or preapproved before you start searching for a home can help you more easily find a home you love within your budget. A preapproval may also make the process of completing a full loan application much easier and faster, because you’ll already have submitted a lot of necessary information to the lender.
While both prequalification and preapproval from a lender help identify your price range, a preapproval letter can signal to your real estate agent and sellers that you’re serious about buying a home. Agents often require a preapproval letter, because it is a strong indication that you are a qualified buyer and can make a competitive offer.
Prequalification
Prequalification means you may satisfy a lender’s general criteria for a mortgage, based on your self-reported financial information, like income, assets, credit, and debt. Prequalification can be as simple as a short phone conversation with a lender. Afterward, the lender may or may not provide you with a letter detailing the types of loans you may qualify for and the loan amount you may be able to borrow.
Prequalification is just a starting point. According to a Zillow survey, about a quarter of prospective buyers who have not yet started working with an agent reported getting prequalified (27%).
If you’re unsure where to begin in your homebuying journey, or aren’t even sure what homes you can afford, start the prequalification process to learn more about your loan eligibility.
Keep in mind, a mortgage prequalification is only as accurate as the information you provide the lender. That’s why those who are ready to buy in the near future often go straight to preapproval, which is a more comprehensive verification process.
Preapproval
A mortgage preapproval means you have a conditional commitment from a lender to approve you for a loan as long as you continue to meet their conditions by the time you close on the home. You’ll need to provide the lender with documents like bank statements, W-2s, and pay stubs. The lender will also run a credit check, which may show as a soft or hard inquiry on your credit report, depending on the lender’s preapproval process.
Once preapproved, you’ll receive a preapproval letter detailing the loan amount, types of loan programs you may qualify for (e.g., conventional, FHA, VA), and an estimated interest rate and annual percentage rate. Assuming you continue to meet the lender’s financial loan qualifications during the underwriting process, your lender will be able to issue a final loan approval. You will still have to complete a loan application before being fully approved for a specific loan program.
A preapproval letter accompanying your purchase offer suggests to the seller that if they were to accept your offer, financing is more likely to go through than without one. Your offer becomes more compelling. According to Zillow’s Consumer Housing Trends Report 2022, 85% of sellers say that they prefer to accept an offer from a buyer who is preapproved.
Difference between preapproved and prequalified
A prequalification can help you prepare to take the next steps towards buying a home and give you a sense of a reasonable budget to stay within when shopping for home. A preapproval gives you a more concrete understanding of your budget, so you can start making offers and can signal to the seller that you are a serious buyer. Here are a few more key comparisons between preapproval and prequalification.
Should I get prequalified or preapproved?
Getting prequalified for a mortgage can be a good starting point if you’re a first-time homebuyer, or if you’re in the very early stages of considering a home purchase. Most prequalifications don’t require a hard credit inquiry, so your credit score won’t take a hit if you decide to press pause on buying. And when you decide to move forward with a preapproval, you’ll already have a good idea of the lender with whom you’ll want to work.
Either way, if you choose to get prequalified or preapproved, you’ll still need to have an offer accepted, a loan application completed, and a purchase contract in place before your lender can fully underwrite and approve your loan.
Why wait to get preapproved or prequalified?
Buyers may want to get prequalified to get a ballpark for their budget and get preapproved when they’re ready to seriously shop and make offers. This is because preapproval letters only last for an average of 45 days. After this period, a new preapproval is typically required, since your financial circumstances could change. For example, you may make new purchases that increase your debt and tighten your house affordability, or you may get a new credit card that causes a hard inquiry on your credit report and lowers your credit score.
With each new preapproval, either a soft or hard inquiry is made on your credit report, depending on the lender’s preapproval process. Hard inquiries can affect your credit score over time. Keep in mind that during that 45-day period from the date of your first mortgage credit check, all hard inquiries are consolidated and won’t individually impact your credit. If your preapproval expires and you’re still actively shopping, reach out to your lender to discuss timing for your next preapproval.
Which is better?
A preapproval letter typically carries more weight than a prequalification, since the preapproval is a conditional commitment from a lender to approve your loan. If you’re uncertain which is the best option for you, your moving timeline can be a good indicator of whether you should choose a preapproval or prequalification. If you’re fully committed to buying a home, starting the preapproval process first might be the right option for you. If you’re curious about whether or not you qualify for a loan and how much you may be eligible to borrow, mortgage prequalification will provide you with helpful information to find a home within your budget.
Written by Jessica Rapp. Provided by Zillow Group.