The Differences Between Mortgage Prequalification vs. Preapproval

Read Time: 6 minutes

Two important steps in the home buying process are mortgage prequalification and mortgage preapproval. They sound similar, and both provide estimates of what you’re qualified to borrow, which is why they are sometimes confused with each other.

However, they are much different regarding how much weight they carry.

A preapproval is a firmer sign of what you can afford and adds more credibility to your offer than a prequalification.

Some people do both, but neither is required when buying a home. Agents and lenders prefer that you take these steps to save money and time when dealing with them and home sellers.

What is Prequalification?

A prequalification is more informal than preapproval. You provide the lender with information on your income, debts, assets, the size of your down payment, and an estimate of your credit scores. The lender considers these factors and gives you a rough estimate of what you can qualify for.

It’s a quick and easy process that gives you some preliminary boundaries to use when you start house hunting. That saves you time by narrowing down your buying options at the front of the process.

Prequalifications usually rely on self-reported information instead of verification by pulling your credit report or reviewing financial documents. Unlike preapproval, you’ll only undergo a soft credit check that won’t affect your credit score.

You’ll be issued a prequalification letter to show real estate agents and sellers that you’re serious about buying a home and to reassure them you can probably qualify for a loan in a specific range.

This is an excellent first step but doesn’t carry as much weight as a preapproval because a lender hasn’t verified your information. In addition, you can’t use a prequalification as evidence of financing when making an offer on a home.

What is Preapproval?

When you’re getting ready to make an offer, industry experts advise that you go through the preapproval process to firm up your financial standing and let all parties in the transaction know that you’re a serious buyer and what your financial limitations are.

For preapproval, you must document your income, debts, and assets extensively and let the lender run a credit check. You may have to pay a fee for this service, which is not the case with a prequalification.

In return, the lender will provide a written document stating exactly how much they will lend you and, in some cases, what interest rate you’ll be charged on the loan.

You can use your preapproval letter as a tool to negotiate the purchase price of a home. It will put you ahead of other possible buyers who have not gone through preapproval because you’ve already taken the first steps to complete the deal seamlessly and quickly.

When Should You Lock in Your Rate?

When you get preapproval, you may request a rate lock simultaneously. This is a smart way to go if your concerned rates could go higher in the near term.

A rate lock means the lender guarantees a specific mortgage rate, even if market rates go higher, provided the loan is closed within a specific time, usually 30 to 60 days. There’s often a fee charged for a lock.

The problem with locking a rate on a preapproval is that if the seller rejects your offer or if you spend a week or so haggling over the purchase terms, the clock is ticking on your lock. If the offer falls through completely, you’ve got a rate lock on a mortgage but no house to buy.

The lock may expire before you can close on another suitable property. 

For this reason, some buyers prefer to wait until an offer is accepted before locking in a rate.

Closing Your Deal

A prequalification or a preapproval does not commit a lender to approving your loan application. Both are important steps to take, but there’s more that goes into approving a home loan than either of these provides.

The home must also pass inspections, appraise at a sufficient value to support the loan amount, and have a clean title, among other things.

Which Should You Apply For?

You can go through both processes, but neither is required.

First-time homebuyers often find that getting prequalified is helpful, especially when establishing their homebuying budget and wanting an idea of how much they might be able to borrow. Prequalifications can be a good option if you’re just starting to look at properties and aren’t completely sure you’re ready to buy. 

Serious and more seasoned home buyers may already have a better read on their finances and a good idea of what to expect, so they might hold off until it’s time to get a preapproval. If you already have a good handle on your budget and a pretty good idea of your loan options, prequalification may not be necessary.

Preapproval can be valuable when making an offer on a house, especially in a competitive market when you want to stand versus other potential buyers. 

While it’s more involved than prequalification, you can still get preapproval in short order. Some online lenders issue preapproval letters in minutes. Others could require as much as a week to review your information.

Home buyers should be clear that prequalification does not always lead to loan approval, and it’s best to avoid making firm plans based solely on their qualification status.

Prequalification vs. Preapproval FAQs

Do I have to get prequalified to start looking at homes?

No. Getting prequalified is a good start to figuring out your home-buying budget, but it’s not a requirement. If you’re early in the process, you can look at homes without prequalification.

Do I need to be prequalified before I can be preapproved for a loan?

No. They are not dependent on each other. If you’re ready to buy a home, you can skip prequalification and go to the preapproval process immediately, especially if you’re ready to make offers.

How long does prequalification or preapproval take?

Prequalifying is a quick process that can be done online, and you may get results in a few minutes or a couple of hours. You’ll supply more information for preapproval, and the process is more thorough, so expect the process to take more time.

Although response times vary by lender, expect to receive your preapproval letter within 5-10 business days after you’ve provided all requested information.

Do I have to spend the full amount I’m approved for?

No. You can shop below your top-end price range, and if you find a home that costs less, you may still get a larger loan, leaving you with extra cash to set aside for other major expenses such as home improvements, college expenses, or retirement. Working with your financial advisor to explore your options before deciding how big of a loan you should get is best.

Do I need to fill out a mortgage application?

With prequalification, the answer is no. With preapproval, the answer is generally yes.

Do both processes require me to estimate my down payment?

With prequalification, the answer is no. With preapproval, the answer is yes.

Dan Rafter

Dan Rafter has covered real estate, mortgage and personal-finance news for more than 15 years, writing for the Chicago Tribune, Washington Post, Consumers Digest and many others. A graduate of the University Illinois with a degree in journalism, he is editor of Midwest Real Estate News magazine and blogs on commercial real estate for that publication at rejblog.com, in addition to being a contributor for Refi.com.

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