Prequalified Vs. Preapproved: What’s The Difference?

Prospective home buyers frequently hear two very similar-sounding terms when they begin house hunting and have decided they need a mortgage. Those two terms are “prequalification” and “preapproval.”

While both terms have their place in home buying vernacular, they’re not interchangeable. Prequalification and preapproval can both be beneficial, but they don’t involve the same processes and they have different advantages.

Let’s dig into the differences between preapproved and prequalified, including how to go about securing a preapproval letter and a prequalification letter, and which one carries more weight.

What’s The Difference Between Preapproved And Prequalified?

The difference between prequalified and preapproved comes down to verification. Prequalification is little more than an estimate of how large of a loan a lender might approve you for, and it doesn’t involve documentation or verification. Preapproval is a more formal approval process and shows real estate agents that not only are you ready to look at houses but you’re a serious home buyer who’s received initial approval for a home loan of a particular size.

A preapproval involves a “hard credit pull,” which is a credit check that will appear on your credit report. Having a lender review your financial documents is also mandatory. Prequalification doesn’t require a credit check, so it won’t impact your credit report.

What Is Prequalification?

When you begin thinking about buying a home and learning what’s involved with getting a mortgage, one of the first matters you’ll need to consider is how much house you can afford. Prequalification is a good way to get a general idea of just that.

Essentially, you tell a lender about your financial situation in fairly basic terms, and the lender then tells you – based on the information you shared – if you’d likely be eligible to borrow a certain loan amount. A variety of prequalification and home affordability calculators are available online to give you a rough estimate.

It’s important to understand the result you get from prequalification will only be as good as the financial information you provide. If you’re ballparking or just plain guessing, your prequalification amount will be of very limited value.

If you’ve already taken steps to get your finances and credit score in order, and you’ve supplied accurate information, you could end up with a pretty good idea of the uppermost limit on your house buying budget.

What Is Preapproval?

Unlike prequalification, preapproval – or applying for initial approval for a mortgage loan – is a formal process that comes with significant scrutiny. Before approving anyone, a responsible lender will request financial documentation and subsequently verify the information the borrower has submitted.

The lender will also typically calculate the applicant’s debt-to-income ratio (DTI) and review their credit score, along with their credit history by performing a hard pull on their credit.

Once the lender is satisfied with your financial information, they’ll issue an initial approval or preapproval letter stating how much they’re willing to lend to you, the home buyer, pending final approval later on. You’ll need that letter to show real estate agents you’re ready to view homes for sale and show sellers you can secure the financing necessary to complete the home purchase.

Keep in mind that although preapproval will make you a more favorable buyer because it shows you’re serious and likely to secure financing for the home, the house itself must be vetted and its value must be assessed through a home appraisal before a lender will grant final approval. The lender may also request to review more of your financial information.

Prequalified Vs. Preapproved: At A Glance

Here are the key differences between being preapproved and being prequalified for a mortgage.

How To Get Prequalified For A Home Loan

First, gather up your financial information, including your credit score, and calculate your DTI for best results. You’ll also need to have some idea of where you plan on looking for a home so you can take property taxes and average homeowners insurance premiums into account as you plan your home buying budget.

Contact a lender if you plan on asking for a prequalification letter, but understand that prequalification usually won’t get you as far as preapproval with agents or sellers.

A preapproval usually lasts for 60 – 90 days.

How To Get Preapproved For A Home Loan In 4 Steps

Each lender may handle mortgage preapprovals a bit differently, but you’ll typically need to take these steps so you can be ready to get preapproved for a home loan.

1. Check Your Credit Score And Report

Knowing your credit score is important before seeking a preapproval. Taking time to get familiar with your score will give you an idea of whether lenders will see you as a good candidate for a loan.

Meanwhile, reviewing your credit history – which is part of your credit report and separate from your credit score – gives you the opportunity to dispute any errors and resolve any issues before starting the preapproval process.

2. Review Your Budget

Before seeking preapproval, you need to know roughly how large of a mortgage payment you can afford each month.

You also need an idea of the amount you can put toward a down payment, which can affect the size of the loan a lender approves you for.

3. Test The Waters With More Than One Lender

Checking with multiple lenders gives you the chance to compare interest rates and offers. Finding the best offer for your situation can save you thousands of dollars over the course of your loan term.

Even if you get preapproved or prequalified by one lender, you don’t have to get your mortgage through them.

4. Gather Information About Your Finances

The lender you work with will let you know what they need from you, including the forms you’ll need to fill out. From there, they’ll verify what you submitted and determine if they’ll preapprove your loan, and for how much.

This step takes a bit of time since you’ll have to provide a variety of documents, such as:

• 1040 tax returns
• W-2s or 1099s
• Pay stubs
• Information on debts
• Employment history
• Employer contact information
• Bank and investment account statements
• Identification, including your driver’s license and Social Security number
• Other financial details the lender requests

What Is Verified Approval?

If you want to go a step beyond preapproval, a Verified Approval can give you even more of a competitive edge in negotiations. A Verified Approval is basically like a preapproval, except that all your information is reviewed and manually verified by an underwriter.

Our colleagues at Rocket Mortgage^® issue Verified Approval Letters ^[1] that reflect the serious look they take at applicants during the initial stages of the preapproval process. As long as your financial situation or collateral value and condition haven’t changed, Rocket Mortgage guarantees you’ll go to closing or they’ll pay you $1,000.

In short: Verified Approval reduces the risk of a deal falling through and can provide you with extra peace of mind.

Why Is Getting Prequalified And Preapproved Important?

Mortgage prequalification is a great first step toward understanding what you can afford when you’re in the planning and preparation stages of buying a home. In reality, though, it doesn’t matter that much to many real estate agents, who won’t generally want to spend time showing homes to buyers who haven’t gone through the initial approval, or preapproval, process.

When a seller receives multiple offers, they can choose the offer that appears most attractive to them. They don’t want to worry that the deal might fall through if you can’t ultimately access the funds you expected.

Preapproved Vs. Prequalified FAQs

If you still have questions about the difference between being prequalified and preapproved, fret not. We have you covered.

Is it better to be prequalified or preapproved?

Both options can be beneficial for home buyers. However, preapproval gives you a competitive edge that prequalification doesn’t when it’s time to make an offer.

Are prequalification and preapproval the same?

No. Prequalification means a lender believes, based on some basic financial information you’ve provided, that you’ll qualify for a loan of a certain estimated amount. Preapproval means a lender has given you an initial loan approval for a more accurate home loan amount.

Should I get prequalified before looking at homes?

You don’t have to secure prequalification or preapproval before you begin your home search, but preapproval can be extremely advantageous when you go to make an offer on a house. In fact, some real estate agents require that you’re preapproved before they’ll devote much time and effort to helping you find and make an offer on a house.

Do I have to get prequalified before I’m preapproved?

Simply put, no. You can jump right to seeking preapproval if you’re serious about purchasing a home and want to make an offer as quickly as possible.

Do prequalification and preapproval affect my credit score?

Prequalification can involve a soft credit pull, which doesn’t negatively affect your credit score. Preapproval typically results in a hard credit pull, which does result in your credit score temporarily dropping by a few points.

The Bottom Line: Preapproval Sends Sellers A Stronger Message

Prequalification is a useful tool for planning your home buying budget, but preapproval is your first major step toward owning a home. You’ll need to be preapproved to work with many real estate agents and to make competitive offers to home sellers.

Ready to take that big first step? Apply online now and get the approval process started.

^[1]Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance and appraisal as well as a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid for self-employed clients. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.