The Difference Between a Prequalification and Preapproval

The Difference Between a Prequalification and Preapproval

Most real estate buyers have heard that they need to pre-qualify or be pre-approved for a mortgage if they're looking to buy a property. Some people use the terms interchangeably, but there are important differences that every homebuyer should understand. The main difference between a mortgage prequalification and preapproval lies in the level of scrutiny and commitment from the lender.

Mortgage Prequalification

  •       Prequalification is a preliminary assessment of your financial situation based on self-reported information.
  •        It typically involves a basic review of your income, debts, and credit score.
  •        It provides a rough estimate of how much you might be able to borrow and what your monthly payments could be.
  •        Prequalification is not a guarantee of a loan and does not involve a thorough verification process.

Mortgage Preapproval

  •        Preapproval is a formal process where the lender verifies your financial information and underwriting had approved you as a buyer based on that information.
  •        It involves a thorough review of your credit report, income, employment history, and assets.
  •        A preapproval letter from a lender is the ultimate commitment and indicates that you're approved for a specific loan amount.
  •        Sellers often view preapproved buyers as more serious and reliable, making it an advantage in a competitive housing market.
  •        Preapproval offers a better understanding of your budget when house-hunting, as it's based on verified financial data.

In summary, prequalification is an initial estimate based on self-reported information and a credit check, while preapproval is a comprehensive assessment that involves verification of your financial details by underwriting. Preapproval carries more weight and is often preferred by home sellers and real estate agents when you're shopping for a home. Take the extra time early on to gather the necessary documentation for a preapproval rather than a prequalification!