If you're a first-time homebuyer, your real estate agent may advise you to get prequalified or preapproved for a mortgage before you begin shopping. But what's the difference between prequalified vs preapproved? This article explains what getting prequalified or preapproved means in the mortgage lending process, the difference between the two, and which is more important for homebuyers.
What does prequalified mean?
A mortgage prequalification is the initial step of the loan process. You provide the bank or lending institution with basic information including your income, assets, and liabilities or debts. The bank will assess your overall credit score by running a soft inquiry credit check which won't negatively affect your credit. If you qualify for a loan, the lender will issue a prequalification letter stating the loan amount you are prequalified for.
Just because you have a prequalification letter does not mean you will actually be approved for a mortgage loan. The bank does not verify any of the information you've provided to them during the prequalification phase. They simply give you an estimation of what you could be approved for subject to further verification. You can get prequalified before you begin shopping for a home or once you've identified a home you recently got under contract to purchase.
What does preapproved mean?
Getting preapproved for a mortgage is the next step in the lending process and is much more involved. You will complete a mortgage application and provide proof of employment or income among other things. The lender then conducts a much deeper review of your financial history including a hard inquiry to credit report to see your full credit history which impacts your overall credit score. and From there the lender will provide you with a conditional loan offer stating the loan amount you are approved for, the interest rate, and other terms of the loan. If agreed, the bank will issue a formal preapproval letter.
It's important to note that the loan amount you are approved for may change from your initial prequalification amount. The more accurate you are with the information you provide during your prequalification, the higher the likelihood that you will be approved for the loan.
What's the difference between being prequalified or preapproved?
|Preliminarily approved for a loan based on basic financial information that has not yet been verified by the lending institution.||Formally approved after the lending institution verified income, debts, and financial history, providing you with a formal commitment or loan offer.|
Do I need to be preapproved or prequalified to start shopping for a home?
Being preapproved or prequalified for a mortgage loan is not a requirement to begin shopping, but can make the shopping process easier. In a competitive market, it's helpful to have at minimum, a prequalification letter. Submitting an offer with a prequalification letter shows the seller that you have started the loan process and are more likely to be approved for a loan compared to a prospective buyer that has not been prequalified, potentially increasing the chances your offer is accepted.
A preapproval letter will send an even stronger statement to the seller because you have been conditionally approved. This shortens the timeline for the loan process and demonstrates that you are a qualified buyer. If you're starting the home buying process, it's helpful to start conducting your due diligence on the various types of financing available for real estate and what it takes to get approved for a loan. Then speak with your local banker or a mortgage broker to see which loan program may be best for you.
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