So you’re ready to start wading into the waters of the housing market in search of the next place you’ll call home. You’ve started thinking about mortgages and have been hearing two very similar-sounding words: prequalification and preapproval. Are they different? Does it matter?
The short answer is: yes and yes. Keep reading to learn the real difference between prequalification and preapproval, and how it could affect your home ownership goals.
If you're wondering how the entire process of buying a home works, read our Complete Guide to Homebuying on a Budget. This invaluable resource offers everything you need to know about buying a home, from setting your budget to move-in day.
Prequalification gives you a ballpark estimate of how much you may be able to borrow toward your new home. The process is simple, it’s usually free of cost, and it can be completed online or over the phone. You provide the lender with information about your finances, such as income, assets, and debts. Note that all of this information is self-reported by you, the potential borrower. The lender does not typically verify your information, nor do they pull your credit report at this time. Your prequalification gives you a general idea of what type of house you can likely afford.
Preapproval gives you an amount you can expect to have offered to you as a home loan. It requires an in-depth analysis of your financial stability and creditworthiness.
When you go through the preapproval process, you’ll fill out a formal application. You’ll provide the lender with documents like W-2s, pay stubs, a summary of monthly expenses, and lists of your current assets. The lender will also check your credit report.
Ideally, you’ve planned ahead and are going through the preapproval process before finding the house of your dreams, and if so you’ll leave the “property” section or sections of the application blank for now.
After a successful preapproval process, the lender should give you a “preapproval letter.”
Note that preapproval is NOT an official loan offer. Other steps are still to come before the official loan commitment. Also remember that if your credit or finances change after you are preapproved, your preapproval could be in jeopardy.