Getting your mortgage approved is one of the most important parts of your journey as a homebuyer. Two key steps before getting approved are mortgage prequalification and preapproval. And in this article, we’ll explain exactly what being “prequalified” and being “preapproved” is, and why they’re so important.
Mortgage prequalifications and preapprovals are both types of approvals that lenders use to verify their clients and make sure they’re reliable people to lend to. They’re both good approvals to get when you’re looking to buy property, but there are some key differences that it’s crucial to understand.
In short, prequalification is just the first step to getting a mortgage approval, while a preapproval is the second, more significant step. Prequalifications mean the mortgage lender is interested in learning more about you; preapprovals mean the mortgage lender is interested in actually lending to you.
What is a Mortgage Prequalification?
A mortgage prequalification is when your mortgage lender collects some basic info about your income and financial situation. If they approve you as prequalified, your lender will give you an estimate of how much you’ll be able to lend from them.
Because mortgage lenders receive a high volume of mortgage questions and applications, the information at this stage is usually sent in by the applicant. Because the lender doesn’t verify the information at this step, they won’t give full approval – instead, if you’re prequalified, they’ll move you to the next step, which is preapproval.
What is a Mortgage Preapproval?
A mortgage preapproval is much more detailed, usually requiring the lender to check your credit score and review your bank statements. If you get preapproved, your lender will usually give you a conditional commitment to providing you with the funds you need.
Because preapprovals usually result in a commitment by the lender to lend you your money, they’re a longer, more thorough process. In addition to usual steps like checking your credit score and requesting information about your income, lenders might also take this time to confirm your employment, request tax returns, or do other types of due diligence.
The benefit to you from the preapproval process is that you get much better information about how much money the lender is willing to lend, and what interest rate they will charge. Because the lender has more information about you, they can give you a better idea of what your mortgage amount and payments will be like.
Key Differences between Prequalified & Preapproved
Here’s a quick rundown of all the key differences between mortgage prequalification and a preapproval:
As you can see, the differences between prequalification and preapproval are significant, especially when it comes to specific information about your mortgage loan, such as the specific amount and the interest rate.
But that’s for a good reason – by getting prequalified first, you’ll be able to get information that you need to make the right choice about which lender to go with. If your prequalification estimate comes back from your lender and it’s too low to afford the kind of home you want, that’s a good sign for you to try getting prequalified from another lender.
Why is Getting Preapproved for a Mortgage Good?
Getting preapproved for your mortgage is always a good sign – it means your lender is seriously considering lending you money to buy your property, and they’re willing to get specific about how much they can lend you.
A major benefit to getting preapproved comes when you’re negotiating with home sellers for buying their property. A preapproval means that you know exactly the amount the lender is willing to lend to you, and that can help firmly set your budget. This way, you’ll know what homes you can buy and for how much.
In addition, you’ll be a more attractive buyer to motivated sellers, as by getting preapproved you’re demonstrating concrete interest in buying property, and in some cases have paid cash money to get preapproved. This sends a major positive signal to sellers that you are strongly motivated to buy and will be a good counterparty.
The other major benefit of getting preapproved for a mortgage is that it speeds up the rest of your mortgage application process. Because your mortgage lender already has important financial documents about you on file, such as your bank statements or confirmation of employment, they can speed up the otherwise slow mortgage approval process.
It’s funny how often this point comes up, but we’ll say it once more just in case: getting prequalified or preapproved for a mortgage is not the same as getting approved for a mortgage! Getting preapproved is a good step, but definitely not the last one before you can move in.
In particular, you’ll still want to make sure you take all the usual precautions in making offers and signing purchase agreements until you confirm the final step in the mortgage process, which is the loan commitment made by the mortgage lender or its bank. This commitment is legally binding, and therefore usually only signed after the lender approves both you and the home you want to buy.
But with that said, getting prequalified and then preapproved for your mortgage is always a solid plan when you want to buy your home. You’ll be better informed about what you’ll be able to afford, and you’ll be able to move faster with your lender to get approved once you have your dream home in mind. They’re a good edge to have in today’s real estate markets.