Mortgage prequalification vs. preapproval: Which is best?

Getting prequalified or preapproved for a mortgage can be two important steps when you want to buy a home. You’ll find out approximately how much you can borrow, giving you a maximum budget for your purchase. And you can get a letter from the lender showing you’ve been conditionally approved for a loan, which could be important when submitting an offer in a competitive market. You’ll also better understand the range of interest rates available to you.

Read on and we’ll explain what these two similar sounding terms mean for prospective homebuyers.

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Prequalification vs. preapproval: Key differences for homebuyers

Understanding the differences between a mortgage prequalification and a preapproval can be confusing because some lenders don’t use the terms in a consistent manner. But what’s most important to remember is that there are two ways to get an estimate from a lender.

We’ll define a mortgage prequalification as the simpler process and the mortgage preapproval as the more complex one, as that aligns with what many lenders use.

• Mortgage prequalification (less complex): One process asks you to estimate some basic information, such as your income, debt, and credit score. Within a couple of seconds or minutes you’ll be able to find out how much you might be able to borrow based on what you shared.
• Mortgage preapproval (more complex): There’s also a process that may require you to complete an application, submit copies of documents, and give the lender permission to check your credit. It can take a few hours or days to get the results, but the lender can show you a more precise maximum loan amount and estimated terms based on current mortgage rates.

Some lenders make a distinction between the two by calling the more complex process a verified approval. However—back to more potential confusion—they might call the simpler process either a prequalification or a preapproval.

Here are some things to be aware of when seeking a mortgage prequalification or preapproval, based on how we’ve explained the terms above.

PrequalificationPreapproval

Estimate of how much you can borrow based on self-reported information.Estimated loan amounts and terms based on verified documentation.

Might involve credit checks that lead to soft inquiries.Could result in credit checks and hard inquiries on all three of your credit reports.

Can be a good place to start when you first consider buying a home.Helpful before going to open houses and making offers.

When to get prequalified vs. preapproved

Prequalification can be a good initial step if you’re thinking about buying a home and want to know how much you might be able to borrow. You can use the results to set goals while saving for a down payment and closing costs, and to set your filters while searching for homes online.

Once you’re serious about your home search, getting preapproved for a mortgage could be a better option. The lender evaluates many of the same information and documents it uses to approve your mortgage, which can give you more confidence that you’ll be able to get approved for a mortgage with the same terms. If you don’t get preapproved today, you can still learn what you might need to do to increase your chances of getting preapproved later.

However, even a preapproval isn’t a guarantee that you’ll ultimately be approved. Even if your finances and credit stay the same or improve, the lender might not approve a mortgage based on other circumstances, such as a home’s condition, appraisal, and whether you can get homeowners insurance.

What is a mortgage preapproval letter?

Another reason to get preapproved for a mortgage is that the lender can give you a preapproval letter.

• The letter will say how much you can borrow based on the information the lender reviewed.
• You can include the letter with your loan offer to make your offer more appealing to the seller of the home you’ve got your eye on.
• Lenders can work with your real estate agent to customize the letter for each offer.

Perhaps you fall in love with a home that’s listed for $400,000 and want to submit an offer. Let’s say you’re preapproved for up to $450,000 and can afford a 20% down payment, but you don’t want to go that high. Instead, you submit an offer for $405,000.

There are different rules of thought, but some agents might suggest you include a letter showing you’re preapproved for $450,000 and could borrow more if the home appraises low or unexpected costs arise. Others might suggest you include a letter with the $405,000 preapproval amount so you don’t reveal your hand.

In either case, say the sellers receive your offer and a competing non-cash offer for $410,000. Even if they could potentially get more money from the other buyers, they might decide to accept your offer because they feel it’s less likely the deal will fall apart.

Depending on the lender, the preapproval letter may be valid for 30 to 90 days. If it expires before you buy a home, you may need to send updated documents or information to get a new letter.

What documents do you need for a mortgage preapproval?

The preapproval process will vary by lender, but you’ll generally need to create an account online and submit various types of information and documents, such as the following.

Personal information

• Name, current address, and contact information.
• A government-issued picture ID.
• Social Security number and card.
• Immigration-related information.
• Employment history for the past two years.
• Rental history for the past two years.
• Information about other properties you own.

Income and tax information

• Recent pay stubs.
• An offer letter for a new job.
• Verification for self-employment income, such as your company’s financial statements.
• Proof of other types of income, such as disability or alimony.
• A gift letter if you’re receiving a gift.

• Tax returns from the past two years.
• Recent W-2s and 1099s.

Account statements

• Checking and savings.
• Brokerage.
• Retirement accounts, such as IRAs and 401(k)s.
• Loans.
• Credit cards.

Get preapproved with multiple lenders

Shopping for a mortgage can be important for getting a mortgage with the most favorable terms. Depending on your situation, that might mean a low interest rate, low closing costs, access to first-time homebuyer assistance, a large loan amount, or an adjustable rate.

Because mortgage brokers and lenders might have access to different types of mortgages and programs, you could try to get preapproved several times and compare your options. Generally, lenders and brokers will require similar paperwork, so it’s just a matter of setting aside time to submit everything to each company.

If you’re not already familiar with the term, a mortgage broker is a professional who can help you comparison shop mortgage offers from a variety of lenders. The lenders often pay the broker a fee for bringing them new customers.

Having multiple preapprovals can also set you up for success later. You might want to hold off on choosing your lender and locking in a rate until your home offer is accepted. And if you’re already preapproved with several companies, it could be easier to compare offers based on the day’s rates and then choose your lender.

The takeaway

Mortgage prequalifications and preapprovals are two ways to see how much you might be able to borrow to buy a home. Although some lenders use the terms interchangeably—or even introduce different terms, like verified preapproval—a prequalification is generally the less rigorous and helpful of the two.

Once you’re serious about buying a home, a preapproval letter can make your offer more competitive. Getting preapproved with several lenders can also help you more precisely understand your borrowing limit, estimated interest rate, and the resulting monthly payments.

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