Understanding the Nuances: Mortgage Prequalification vs. Mortgage Preapproval

In the exciting journey of purchasing a home, navigating the terminology and processes involved can feel like diving into a sea of jargon. Two terms often encountered in this realm are “mortgage prequalification” and “mortgage preapproval.” While they sound similar, they are the difference between formal and informal in the homebuying process.

Mortgage Prequalification:

Think of mortgage prequalification as the preliminary step in the homebuying process. It’s a relatively quick and simple assessment based on information provided by the buyer. Typically, the lender evaluates factors such as income, debt, and assets to estimate how much mortgage you may qualify for.  In my 20 years I suggest you use this in the initial conversation with your loan officer as a tool to get a ballpark where to start.  

Key Characteristics of Mortgage Prequalification:

1. Informal Assessment: Prequalification doesn’t involve a deep dive into your financial history. Instead, it’s a simple glance to give you a rough idea of what you might be able to afford.
2. No Verification: The information provided during prequalification isn’t verified by the lender. It’s based solely on what you disclose.
3. Non-Binding: Prequalification letters are not commitments from the lender. They’re more like ballpark figures that give you a starting point for your home search.

Mortgage Preapproval:

On the other hand, mortgage preapproval is a process recognized by professionals within the industry that provides trust and confidence. It involves an examination of your financial background by the lender. In the past it would almost always involve provide documentation such as pay stubs, tax returns, and bank statements to support your application.  Depending on some factors, a lot of income and asset verification is done through secure electronic verification today.  This makes it super fast compared to the ways of the past.

Key Characteristics of Mortgage Preapproval:

1. Formal Application: Preapproval requires you to complete an official mortgage application. The lender will use this, along with the supporting information/documents, to conduct a comprehensive review.
2. Credit Check: Unlike prequalification, preapproval involves a credit inquiry. This allows the lender to assess your score, calculate your debt ratio and determine the terms of your potential loan.  All of which are required to accurately provide you a reliable estimate as well.
3. Binding Offer: A preapproval letter is a formal commitment from the lender, stating the amount you’ve been conditional preapproved to borrow. In modern day Real Estate sellers are advised by their Realtor to accept only preapproved buyers if it’s not a cash offer, as it indicates a serious intent and ability to secure financing.

Understanding the Difference:

While both prequalification and preapproval can give you an idea of your homebuying power, preapproval carries more weight in the eyes of sellers and real estate agents. It shows that you’ve taken the necessary steps to secure financing and are ready to make an offer.

In essence, prequalification is a helpful starting point, offering a rough estimate, while preapproval is a concrete step, providing you with a solid foundation as you embark on your homebuying journey. Whether you’re in the market for your first home or looking to upgrade, understanding these distinctions can empower you to make informed decisions and navigate the process with confidence.

Other Links about using preapproval vs prequalification when buying a house:

Preapprove to WIN in Multiple Offer Situations

Preapproval vs Prequalification in Mortgage