Prequalified vs. preapproved: What’s the difference?

Mortgage borrowers (and some lenders) often use the terms “prequalified” and “preapproved” interchangeably, but they aren’t quite the same. Both relate to your status before you actually get a home loan but have some key differences. Here’s what you need to know about preapproval vs. prequalification.

What is the difference between preapproved and prequalified?

The main difference between prequalified and preapproved: Preapprovals hold more weight when trying to buy a home.

Prequalifying involves providing some basic financial info to get a general idea of whether you can get a mortgage, how much you could borrow and the interest rate. For a preapproval, lenders do a deeper dive into your financial situation and need more documentation.

There’s a bit more to it than that, though. Here’s a side-by-side comparison of mortgage prequalification vs. preapproval.

What is a mortgage prequalification?

Some mortgage lenders give borrowers the option to see if they prequalify for a loan.

To get a prequalification, you’ll need to undergo a soft credit check — which won’t affect your credit score — and submit basic information about your financial situation.

A mortgage prequalification is only a general indication that a lender could approve you for a mortgage if you formally applied. It might be your first step in the homebuying process, and you can usually get a prequalification through a phone call or brief online application.

What is a mortgage preapproval?

A mortgage preapproval is a letter or written statement specifying your maximum loan amount and the lender’s commitment to fund the loan if your financial situation remains unchanged.

Obtaining preapproval requires providing extensive documentation regarding your income, savings and debt. You’ll also undergo a hard credit check. Lenders use this information to determine whether to offer you a loan, how much to lend you and at what interest rate.

The mortgage isn’t a done deal until the loan goes through underwriting and the lender confirms the information in your application. If there are discrepancies, your loan terms could be modified, or the lender may deny your application.

“Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns and bank statements,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”

Which should I choose: Preapproval or prequalification?

When it comes to preapproval vs. prequalification, they have one major thing in common: They’re both indications from a mortgage lender that you are eligible for a mortgage. However, a preapproval is much more detailed — and more of a guarantee.

“Because prequalification may not always lead to loan approval, it is important for homebuyers to avoid making any firm plans based on their qualification status,” says McBride. “If the mortgage lending process were a highway intersection, prequalification would be the yellow traffic light, and preapproval would be the green light.”

That green light is important in today’s housing market. Since some markets are especially hot, sellers might be getting competing offers. If they’re comparing one offer without a preapproval letter to an offer that does have one, they’re likely to go with the preapproved buyer — it’s a safer bet.

While there are differences between getting preapproved vs. prequalified, both processes usually involve credit checks: a soft check for prequalification and a hard check for preapproval. Only hard checks will impact your credit score, and typically, these are recorded as one inquiry on your credit report if they’re done within 45 days.

How to get started with the preapproval process

Before you ask a mortgage lender to preapprove you for a certain amount of money, look at your budget to determine how much you can contribute to a down payment. Most lenders will want an idea of what you plan to cover to have an estimate of your loan-to-value (LTV) ratio. Gather all the documentation a lender will request so you’re ready to hand it over.

Remember, just because you get preapproved or prequalified from one lender, it doesn’t mean you have to actually get your mortgage through that specific lender. Always shop around before you make the final call on a lender, because interest rates and terms vary. By shopping with multiple lenders, you can determine if you’re getting the best deal.

Preapproval vs. prequalification FAQ

• Is preapproval and prequalification the same thing?

  No, they aren’t quite the same thing. Prequalification is not as involved as preapproval. It does not require providing more extensive financial documentation and typically does not require undergoing a hard credit check. Prequalification is simply designed to allow applicants to determine whether they would qualify for a mortgage and for how much.
  

• Do I need to get prequalified before shopping for a home?

  No, you don’t need to get prequalified before shopping for a home. But doing so is very useful. Prequalification will let you know whether you’d qualify for a mortgage and for how much. Taking this step can give you a better idea of your home shopping budget.
  

• Do I need prequalification before I can get preapproved?

  No, you don’t need a prequalification to get preapproved. If you’re ready to buy a home and have all of your documents in order, you can simply proceed with applying for full preapproval rather than prequalification.
  

• What is the best time to get preapproved or prequalified for a mortgage?

  You should get preapproved or prequalified before you begin looking at homes. A seller will want the assurance that you’ve done the prep work — and that a bank or credit union has done enough research to feel confident about loaning you the money. Some real estate agents prefer you be preapproved or at least prequalified before they start working with you, too.