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Mortgage Pre-Approval vs. Prequalification: What's the Difference?

Updated
Kimberly Rotter, AFC®
By: Kimberly Rotter, AFC®

Our Mortgages Expert

Eric McWhinnie
Check IconFact Checked Eric McWhinnie
Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.

Mortgage pre-approval vs. prequalification -- these terms are often used interchangeably by home buyers and some real estate professionals. But they are not the same. The terms have different meanings, and it's important for potential buyers to know the difference.

Below, we'll explore mortgage pre-approval vs. prequalification and learn when each one is the smart move.

Mortgage pre-approval vs. prequalification: Definitions

A mortgage prequalification is when you submit basic information to obtain a rate quote. The process is usually quick and informal. But it does not represent an actual commitment to lend you money.

A mortgage pre-approval, on the other hand, is a thorough process in which the information you submit gets verified. In most cases, a mortgage pre-approval is a tentative commitment from the lender that -- if all circumstances remain unchanged when it's time to submit the final loan application -- the loan will be approved. It's also sometimes called an offer to lend, not a commitment, because there are a few caveats. For example, the borrower's creditworthiness can't go down, the home needs to appraise for a high enough value, and the borrower needs to get any required insurance policies.

Having a pre-approval letter in-hand can carry a lot of weight when you're shopping for a home.

Mortgage pre-approval vs. prequalification: Which is better?

When it comes to mortgage pre-approval vs. prequalification, it's important to keep in mind their two distinct purposes. Pre-approval is often a commitment to lend. Prequalification is a quick and easy way to learn about mortgage possibilities when you plan to buy a home, and it can make it easier to start considering possibilities among homes listed on the best real estate and home-buying apps.

When deciding between mortgage pre-approval vs. prequalification, it's most important to know that not everyone gets pre-approval, but just about anyone can get prequalified.

Anyone can get a mortgage prequalification because it's based on information you provide. For a mortgage "prequal," most lenders run a soft credit check, which gives them your credit score and a few details, but not your full credit history. (By the way, this kind of soft pull doesn't affect your score at all.) The lender generally won't verify employment, review your financial documents, or confirm your assets for a prequal.

Here's a mortgage pre-approval vs. prequalification example. Mortgage lenders may use prequalification to determine if a borrower's debt-to-income ratio is within lending standards, but don't examine detailed information about the borrower or perform a credit check. Pre-approval, however, entails verifying the information in your application.

This isn't to say that a prequalification isn't useful. A mortgage prequalification can be a great first step in your buying process -- use a prequal to learn how much you can afford to borrow before you start looking at homes.

Mortgage pre-approval vs. prequalification: Which process takes longer?

When it comes time to weigh mortgage pre-approval vs prequalification, remember you can usually apply for a prequalification and get results in a few minutes.

Loan pre-approval takes a little longer because the loan underwriter verifies all the information you provide. A pre-approval is basically a mortgage application without a specific home attached to the application. The lender checks your credit report, and verifies your employment history, income, and assets.

Even with the higher level of scrutiny, if the lender can digitally verify your information, your pre-approval could be ready within a day. In some cases, you may have to wait two to three days for an answer.

Here's a sampling of items you may need to submit to the lender to obtain a mortgage pre-approval (this list is by no means exhaustive):

  • Your residential address(es) for the past two years, along with contact information for landlords if you have them
  • Bank statements for all checking, savings, and other asset accounts
  • Pay stubs from the past 60 days
  • W-2s for the past two years
  • Your Social Security number, so the lender can pull your credit report and score

You may be asked to provide additional documents if they apply to you, such as proof of child support that you receive and want to count as income, or documentation of any gift funds you plan to use.

Many lenders offer mortgage pre-approval for free, but some charge. If you are asked to enter a credit card number when you submit your application, that is, of course, a good indication you're going to be charged. Some lenders refund your application fee if you take the loan.

Once you are pre-approved for a mortgage, the lender gives you a mortgage pre-approval letter. The pre-approval letter includes information about the lender, the home loan program for which you've been approved, and the maximum amount of money they are willing to lend you. (Some lenders also offer a prequalification letter, but again, it's not a commitment to lend.)

Loan pre-approval can help you tremendously as a prospective buyer

If you're weighing the pros and cons of mortgage pre-approval vs. prequalification, consider that a mortgage pre-approval letter can be an important shopping tool. The last thing a seller wants is to take their home off the market for a month or longer, only to have to re-list it because the home buyer couldn't get a mortgage loan. In fact, some sellers only entertain pre-approved and all-cash offers.

While a pre-approval letter doesn't give you quite the offer strength of a cash buyer -- since final mortgage approval comes later -- it is the next-best thing. A pre-approval tells sellers you are serious and prepared.

TIP

An important detail to know

You can typically request a pre-approval letter for an amount lower than your full approved amount. That way, if you want to offer $250,000 for a home, you don't need to tell the seller you've been approved for as much as $300,000. Most lenders are happy to provide this letter, and it can be an effective component of your negotiating strategy.

Mortgage pre-approval vs. prequalification: Which one is required?

Whichever option you go with after considering mortgage pre-approval vs. prequalification, the final decision is up to you. They are both optional -- you don't absolutely need to obtain a mortgage pre-approval letter to start shopping for a home.

However, both can be useful parts of the mortgage process.

First, a mortgage prequalification tells you what ballpark price range to shop in. It's especially useful for people who have no idea how much house they can afford. It can also alert you to steps you should take to improve your credit standing or financial situation before starting your home search. For example, you might find out you could get a better rate if you raise your credit score by just a few points. A prequal can help you learn how firm your footing is.

Mortgage pre-approval says you can get a loan, and for how much. And from a seller's perspective, a pre-approved buyer is more likely to be able to close on the home at the agreed price.

Obtain multiple pre-approvals to find the best loan

You can use pre-approvals to rate-shop if you apply for pre-approval with a few lenders and compare offers. You can apply to the lenders separately, or go through a mortgage broker.

When you get pre-approved, the lender tells you the interest rate you qualify for. You might be shocked to know how much difference even small variations in the interest rate make. For example, on a $250,000 30-year fixed-rate mortgage, the difference between a 7% interest rate and 7.5% is more than $30,000 over the term of the loan. Why put that money into someone else's pocket if you don't have to?

Also, even if two banks offer you the same interest rate, the fees they charge can vary significantly.

How to protect your credit while you shop for a mortgage

There's a safety net that protects your credit when you compare mortgage offers. Applying to multiple lenders won't hurt your credit score. There are special rules in the FICO and the VantageScore credit-scoring formulas that encourage consumers to shop for the best mortgage. While it's true that each time you apply for new credit your score could dip, all mortgage applications you make within a specified shopping period count as a single inquiry for scoring purposes.

That means you can apply for pre-approval with one, two, five, or 100 mortgage lenders. The effect on your credit score is the same -- as long as you make all your applications inside the shopping window. It's between 14 and 45 days, depending on the scoring model (stick with 14, since you won't know which credit-scoring model a lender is using).

Smart ways to use mortgage prequalification and pre-approval

When it comes to mortgage pre-approval vs. prequalification, both are good tools. Shopping around during your pre-approval process can save you money. You don't have anything to lose, except maybe a few hours of your time, and doing so could save you thousands of dollars.

Choosing mortgage pre-approval vs. prequalification can be easy. Prequal comes when you are educating yourself, before you shop. Pre-approval comes when it's time to choose a lender and prepare to make an offer.

Still have questions?

Here are some other questions we've answered:

Ready for mortgage pre-approval?

Getting pre-approved for a mortgage loan is an important step in the home buying process. Our experts recommend mortgage pre-approval before you begin looking at houses or deciding on a real estate agent.

FAQs

  • Yes, finding out where you stand is a good step to take early in the home-buying process. Check your own credit and prequalify with a lender or two so you'll know whether it's the right time to move forward. This is an informational step, doesn't affect your credit score, and doesn't lock you into any loan. Depending on what you find out, you could then move on to improve your credit score, save more money, or start submitting mortgage applications.

  • Each lender sets its own credit score cutoff. Technically, it's possible to get an FHA loan with a FICO® Score of at least 500 and a 10% down payment, but most lenders require a higher score. If you're worried your credit score may not be high enough, it's a good idea to prequalify first. Also, ask the lender what credit score would be needed to get a lower interest rate. If your own score is close, you might want to try to raise it before applying because a mortgage interest rate that's even a fraction of one percentage point lower could save you a lot of money over time.

  • Yes, there are several reasons a loan might be denied after pre-approval. The most common ones are related to low home appraisals and changes in the borrower's credit standing. For instance, after you're pre-approved, it's a good idea to avoid increasing your credit card balances because a higher utilization ratio could affect your mortgage loan application. You also don't want to deplete your savings because mortgage lenders require that you have cash reserves set aside. So don't be tempted to buy anything for your new home until after your loan closes.

Our Mortgages Experts