If you’re getting ready to apply for a mortgage, at some point you will come across the terms “prequalification” and “preapproval.” While often used interchangeably, these terms mean something slightly different.
Knowing the difference will help you decide which one you need, depending on where you are in your homebuying journey, whether it’s early days or you’re ready to start making offers on homes. Below are the main differences at a glance.
Prequalification vs. Preapproval
|Might include a credit check but a soft one||Includes a credit check|
|Requires an estimate, not proof, of financials||Verification of employment and financial documents are required|
|Provides an estimate for how much home you can afford||Provides tentative mortgage offers (no guarantee of approval)|
|Shorter process; response in a few minutes||Longer process; answers in a few days|
|Doesn’t necessarily provide sellers confidence in your buying power||Offers legitimate proof to sellers that you’re a serious buyer|
Overall, the main difference between prequalification and preapproval is how in-depth a lender goes when collecting your information for a potential mortgage. Prequalification involves acquiring basic financial information for an affordability estimate, whereas preapproval is going to provide a more accurate assessment of your purchasing power.
What is Prequalification?
Prequalification is going to be the first step of your homebuying journey. During the prequalification stage, a lender will collect only basic financial information in order to give you an affordability estimate. This includes an assessment of your finances, credit and current debt, but it’s not an in-depth evaluation.
However, prequalification provides no guarantee that you will be approved for a mortgage. Nor does it qualify you as a serious buyer to agents. The process gives you a rough idea of how much you’ll be able to borrow and helps narrow down your budget for a home.
Will Mortgage Prequalification Hurt my Credit?
A prequalification will not affect your credit as long as the lender uses an estimated credit score or a soft inquiry.
During the prequalification process, lenders are not required to officially verify credit or financial information. Instead, they often rely on self-reported information. Some lenders will perform a soft credit check, but this won’t show up on your credit report.
However, this means that the prequalification should only be considered a rough estimate. It’s not a thorough check of your credit history. The affordability estimate may change once you apply for a mortgage or preapproval.
What is Preapproval?
Preapproval, on the other hand, is a more official step toward applying for a mortgage. This involves a detailed assessment of your current and past financial situation.
At this stage, a lender will need to verify employment and credit history to confirm your ability to pay back a mortgage. The information you'll be asked to provide includes pay stubs, tax returns, or social security information.
This process takes longer and is much more detailed than a prequalification. However, it provides all the necessary documentation to show sellers and agents that you’re serious about purchasing a home
Having a preapproval can make you a much more attractive buyer, which is incredibly important in a highly competitive housing market. A seller is much more likely to go with your offer than someone without preapproval.
What are the Minimum Requirements for Loan Preapproval?
In order to get preapproval for a loan, you will need to submit the required documentation so that the lender can fully assess your finances.
Lenders will want to confirm the following information before granting loan preapproval:
Personal identification, such as a passport or driver’s license
A minimum credit score based on the type of loan and lender’s guidelines
Financial information that shows your debt-to-income ratio
Two years of employment history (not necessarily at the same place of work)
Social Security information
Business tax returns (if self-employed)
Investment account statements (if applicable)
Rental information and landlord references
Down payment proof (including gift letters if your down payment was a gift)
Each lender will have slightly different criteria. For example, some may only require a credit score of 580 and above. Certain lenders might be stricter about the debt-to-income ratio and require no more than 43%, others may be willing to accept higher ratios.
That’s why it’s wise to check your lender’s individual loan requirements before applying. However, all lenders will verify basic information such as your ID, credit report, income, down payment, and monthly debts. It's important to gather these documents ahead of time so you can submit them quickly when the time comes.
What Do I Need for a Prequalification vs. Preapproval?
|Income Information||Recent pay-stubs, typically within 30 days|
|Credit score estimate||Credit check|
|Bank account information||Bank account numbers and recent bank statements|
|Desired mortgage amount||Desired mortgage amount|
|Down payment amount||Down payment amount|
|No tax information needed||W-2 statements, business tax returns, personal tax returns for last two years|
Should I Get Preapproved or Prequalified?
Which one is right for you? This will depend on when you’re ready to start shopping for your new home.
On the one hand, prequalification is an affordability estimate that’s quicker to apply for, and doesn’t require a hard credit check or a great deal of documentation. This is usually best suited very early on in your homebuying journey. It can help you determine how much home you can realistically afford.
Preapproval, on the other hand, is a more serious assessment of your buying power. You must submit the required documentation and be prepared for lenders to thoroughly check your financial history, credit score, debt-to-income ratio, employment history, and the source of your down payment.
While this is a lengthier process, it will also put you in a much better position to start putting offers on homes. A preapproval is a clear indication that you’re a serious buyer who will most likely get accepted for a mortgage needed to buy a house.
If you’re ready to become prequalified or preapproved, get a quote from Paddio today to determine how much you might be eligible to borrow.