When starting on your homebuying journey, two of the terms you can expect to come across are prequalified vs. preapproved. While each of these terms tends to have its own meaning, there might also be some overlap between them, depending on the lender and the type of mortgage you are seeking.
One thing prequalification and preapproval have in common is that they are steps the borrower would take before choosing a new home, as they set in motion the purchase price threshold.
However, there are critical differences between them, with the prequalification more general and the preapproval more formal in nature. In this article, we will help to clarify some of the nuances between prequalified vs. preapproved in the mortgage application process.
Mortgage Prequalification Explained
A mortgage prequalification is a feature provided by lenders designed to let potential home buyers know what price range they can afford for a property and an approximate interest rate on the mortgage loan. It is often the first step that a borrower takes toward home ownership.
Depending on the lender, a borrower could go through the prequalification status process online or over the phone. They should be prepared to share some personal financial data with the lender and agree to a credit check. In doing so, they can expect to learn if they are likely to be approved for a mortgage.
Take the first step by filling out this quick and easy online prequalification application. It’s free and takes only 60 seconds to complete.
While it is not a commitment on the part of the lender, it is a glimpse into parameters that the borrower can expect to find when buying a home. A mortgage preapproval will not expire, so unless a borrower’s financial situation or interest rate environment changes dramatically, they can expect the estimate of what they can afford to hold.
Mortgage Preapproval Explained
A mortgage preapproval is a more formal status vs. prequalification and is provided by the lender in the form of a letter or document. It details the highest amount that a borrower could qualify for in a mortgage and commits the lender to fund the loan as long as the borrower’s financial situation checks out and remains intact.
To secure preapproval status, the borrower must complete an application and disclose information such as their income, savings, and debts including credit card balances and student loans, for example. If the application is approved, the lender will decide the amount of the mortgage loan and terms such as the interest rate.
The preapproval process could take anywhere from a few minutes to a week, depending on the lender. Getting preapproved for a mortgage could make the home buying process go faster and smoother considering the seller has the confidence you can afford the house and have been preapproved for a mortgage up to a specific amount.
While a preapproval brings the borrower one step closer to buying a home, the loan remains subject to the underwriting process, where the application details are verified. The underwriting results could alter the terms or status of the loan.
By completing Total Mortgage’s Green Light Approval, you will be well on your way to homeownership. That is because this feature ensures you a 21-day closing, giving you more time to devote to finding the right property.
Key Differences Between Prequalified vs. Preapproved
When comparing prequalification vs. preapproval, you will find there are several key differences, including the following:
- With a prequalification, there is no formal application process while with a preapproval an application is necessary. While a credit check is part of a preapproval, it may or may not be included with a prequalification.
- A prequalification status will let you know the high end of the size of the mortgage for which you could be approved, while a preapproval takes it a step further by providing loan approval on a conditional basis.
- The response time for a mortgage prequalification should be quick while in some cases obtaining preapproval status could take several days.
- A loan prequalification is not something you submit along with an offer on a property, while a preapproval letter can be used to convince the seller you are prepared to move forward with a deal.
- The information you will need to share is different for prequalification vs. preapproval. With a prequalification, you can expect to provide a high-level overview of your financial profile, including your income and debts, without having to upload any documents. However, with a preapproval, the requirements are more specific and will require proof of income as well as bank, credit card, and tax statements.
- One similarity with getting prequalified vs. preapproved is that both processes take place before you begin house hunting. The preapproval in particular demonstrates to the seller that a borrower is serious about purchasing a particular property and that a lender is willing to work with them.
Which One Is Right for Me — Prequalified or Preapproved?
If you are deciding between getting prequalified vs. preapproved, there are a couple of things to keep in mind. While a prequalification will help you hunt for homes that are likely to be within your grasp, it is not a guarantee that a lender will approve your mortgage application. As a result, even if you receive a preapproval, it is not time to hire the movers just yet.
If it is greater certainty you are after, then the preapproval process is what you probably need. BankRate Chief Financial Analyst Greg McBride compares the mortgage application process to a traffic intersection, saying the prequalification is akin to a yellow light while a preapproval status is a green light for buying a home.
While the prequalification gives the potential homebuyer price guardrails, a preapproval gives them more security that they will be approved for a mortgage.
Now that you know the key differences between being prequalified vs. preapproved for a mortgage, you might be ready to take the next step toward home ownership. Before attempting to receive prequalification or preapproval status, evaluate your situation so you know the size of the down payment you will be able to afford. This is a piece of data that a lender could ask you to get a better sense of your loan-to-value ratio.
Total Mortgage has experts standing by at branches across the country. Find a location in your neighborhood and start the loan preapproval process for your new home today.