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What’s the Difference Between a Mortgage Preapproval and Prequalification?

Buyer Strategies, First-Time Buyer, , ,

When you’re buying a home in this hot of a market, you have to do everything you can to stand out from your competition. Even then, many buyers are making four, five, six offers before one is accepted. That’s okay. While the majority of us are not in a position to be “those” homebuyers who walk in, pay 100% cash for a house, and are toasting at closing within weeks. However, you can position yourself by getting a pre-qualified mortgage or (even better) a pre-approved mortgage. So, what’s the difference between a mortgage prequalification and a preapproval?

Why in the world are there two “pre” mortgages? Do you need both or just one? Let’s look at them side by side and find out.

Want to jump around a bit? No worries! Here are some links to jump you right to what you need to know!

What is a Mortgage prequalification?

A mortgage prequalification is a quick estimate of how much home you can probably afford. Probably is italicized for a reason; it’s that important to acknowledge it is what you PROBABLY can afford. (At least according to the lender—your actual home budget should be a separate conversation.)

Why is it a quick estimate? Because, honestly, you don’t need to do much to get one. All you need is your name, phone number, and some numbers (real or fake) that show your income, assets and debts. Give these to your lender over the phone, online or in person—and they’ll give you a prequalification on the spot.

When is the best time to get a mortgage prequalification?

Since a prequalification gives you a big picture idea of how much mortgage you would be approved for, the best time to get one is in the very beginning—when you’re reviewing your budget. Think of it as the first step in the mortgage process.

Coming Soon! We are extremely lucky to have amazing local lenders who will educate you with kindness, care, and your best interests at heart. Check here for a list of local lenders (you will most likely recognize a name or five; beauties of a small town, right?).

What do you need to get a mortgage prequalification?

Here’s the tea, the real sauce, the cold hard truth— yes, while you need a lender to get a prequalification…that’s about it. As long as you have numbers in your head or on paper, you can get prequalified.

What is a mortgage preapproval?

A mortgage preapproval is the older sibling of a prequalification; goes through a bit more and knows more. It’s a deep dive into your income, assets, credit history, rental history and debts. It will give you a concrete idea of how much home you can afford—according to your lender. When you get preapproved, a lender verifies you’re employed, checks that you aren’t falsifying the facts, and makes sure you aren’t up to your eyeballs in debt.

When is the best time to get a mortgage preapproval?

The same as with mortgage prequalification, the best time to get a mortgage preapproval is when you’re ready to start shopping for a house. In fact, we’re going to let you in on a little secret—you can skip prequalification and go straight for preapproval.

When you receive your preapproval, keep one important fact in mind: Your lender will likely approve you for way more money than you should consider spending on a home. Stick with these two guidelines and you’ll have a home you can truly afford, while you work toward bigger financial goals like saving for retirement or paying for your kids’ college:

You’ll be tempted to look at more expensive homes, especially when you see how much your lender thinks you can afford. But a huge mortgage payment will ultimately make your home a curse, not the blessing it should be. Talk to your local lender about what you can afford to pay on a monthly basis in housing costs (I’m talking escrow: mortgage which is principle and interest, property taxes, homeowners insurance, and if you put down less than 20%, PMI).

What do you need to get a mortgage preapproval?

Remember how easy it was to get prequalified? You didn’t have to do hardly anything, right? Just a few button clicks here, a little bit of info there, and poof! You were prequalified! Well, get ready. To get preapproved, you have to give your lender a lot of documents, including all of the following:

Proof of Income and Employment

  • Paystubs from the last 30 days
  • W-2s from the last two years
  • Personal federal tax returns from the last two years (include all tax tables and schedules)

Plus more if any of these apply to you:

  • Freelance or business tax returns from the last two years (include all tables and schedules)
  • If retired, your benefit reward letter, your last two years of 1099 forms and tax returns

Proof of Assets

  • Bank statements from the last two months of all your accounts: checking, savings, Roth IRA, 401(k) and stocks. The statements must show your name, account number and the name of your bank.
  • If someone in your family is helping you pay for the house, a gift letter signed and dated by the person helping you.

Proof of Identification

  • A copy of your driver’s license
  • Your social security number or card

Credit Score

  • Your lender will check your credit. They’ll do this on their own, so you won’t have to submit anything. (No credit score? Read more here.)

How long does it take to get a mortgage preapproval?

The biggest kicker with the timeline of a mortgage preapproval is preparing your documents. Have all of your documents? You could walk out of the lenders office the same day you visit with a preapproval letter. However, if you have lots of debt and a low credit score, it can delay the process—anywhere from a few days to several months.

Do preapprovals expire?

Most definitely! Even in normal times, you could lose your job, take on new debt, or experience other financial hazards. Your preapproval would then no longer reflect your financial life. Mortgage preapprovals typically expire after 60 to 90 days. However, I’m not a lender so it’s always best to check in with your local lender to make sure you know exactly how long your pre-approval is good for.

How are prequalifications and preapprovals similar?

Even though these terms read extremely similarly and while they do share some similarities they are not interchangeable. In fact, they have three major differences.

1. Prequalifications give you an estimate of what you can borrow. Preapprovals tell you what you can actually borrow.

A preapproval states the specific loan amount that you’re eligible for. It’s not an estimate. Sure, you can “guess-timate” and get prequalified, but the evidence has to be there for preapproval.

2. A preapproval requires thorough documentation. A prequalification does not.

A lender will take your word for prequalification. But to be preapproved, you need to prove that your numbers are accurate and up-to-date.

3. A preapproval requires a credit history check.

In addition to the mountain of documents you provide, a lender will run a credit check to see how well you’ve handled debt in the past.

Why are preapprovals stronger than prequalifications?

So here’s the real sauce: A mortgage prequalification is a first step to getting a mortgage—one that gives you a rough idea of how much you can borrow. Since the prequalification process is quick and easy, it can help you get the ball rolling, gain some momentum, and start working with a lender.

You get preapproved when you know you’re ready to buy a house. In fact, if you want any credibility as a homebuyer, you need at least a preapproval. Home sellers know how easy it is to get a prequalification—that’s why they don’t hold much weight. In fact, in this market, most sellers agents are strong suggesting (hint hint: basically requiring) that buyers are pre-approved before they even set up a showing. That is how serious this is!

On the other hand, when you’re preapproved home sellers take you seriously. They know you want a house so bad that you’re willing to go through the excruciating paperwork process of getting preapproved. You’re either totally nuts—or confident you can buy a house.

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