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Preapproved vs. Prequalified – Difference Between These Mortgage Terms


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Getting a mortgage to buy a home is complicated. Making sure you have good enough credit to qualify and can provide a proper down payment can be difficult enough. According to the Urban Institute, in 2017, banks rejected almost one-third of applicants for mortgages.

Hearing terms like “preapproval” and “prequalification” just makes the process more confusing. What do those terms mean, how does preapproval differ from prequalification, and why would you want to be preapproved or prequalified in the first place?

What Is “Prequalified”?

Prequalification is a process during which lenders take a quick look at your financial details. Based on the information you provide, the lender lets you know whether you have a solid chance of qualifying for a mortgage and estimates how much you can borrow.

So “prequalified” means you have gone through the very beginning processes of getting a mortgage from your lender.

Prequalification is very informal. Banks do little vetting at this step, relying on the information you give them. You could lie to the bank about your finances — for example, misstating your debt-to-income ratio — to get any kind of prequalification you want.

But it would ultimately be useless because prequalification doesn’t guarantee you can borrow as much as you’re prequalified for. In fact, prequalification doesn’t even guarantee you can get a loan at all.

The upside of prequalification is that the process is quick. You can usually get prequalified over the phone or in one visit to the bank. It serves as your opportunity to start a relationship with a lender and get a feel for whether you want to work with it.

You can also get some advice about the type of mortgage that’s best for you. Lenders also value this relationship-building opportunity and don’t charge for prequalification.

If you want to work with a lender for a prequalification, you don’t need much. All you have to do is meet with a lender and provide some financial information, such as income, debt, assets, and account balances. You don’t need any documentation at this stage.


What Is “Preapproved”?

Preapproval is the next step after prequalification. Getting to this point requires a more formal review of your financial situation and spending more time working with an individual lender.

Working with a lender for a preapproval involves a lot more paperwork and effort than prequalifying. You must fill out a full mortgage application, provide an estimate of your down payment, and let the lender go through its full vetting and due diligence process.

Some of the documents you need to provide include:

  • Pay stubs
  • Tax returns
  • W-2 forms received in the past two years
  • Documentation of any additional income, such as a contract showing your job’s commission or bonus structure, proof of alimony or child support payments, bank or investment statements with interest or dividend income, and Social Security income
  • Bank and brokerage statements showing your account balances
  • If your family is giving you money, a letter certifying the gift is not a loan
  • Photo ID

If you’re applying for a mortgage and self-employed or work in a volatile industry, you might need additional documentation. Make sure to ask your lender exactly what it needs and do your best to provide all the documentation you can. The clearer the picture your lender has, the faster it can decide on your application.

Your lender also checks your credit and asks you questions about anything unusual or concerning, such as a high number of recently opened accounts or a bankruptcy that’s still on your report.

Preapproval for a loan means a lender has done its due diligence and is willing to offer a loan and can now give you a specific maximum amount it can offer. Preapprovals also contain interest rate information, letting you estimate the cost of the preapproved loan.

Because preapproval is a more involved process, you must pay any application fees the lender charges. It also impacts your credit, dropping your score by a few points.


Why Would You Want to Be Preapproved or Prequalified?

Getting preapproved or prequalified for a loan gives you a leg up over other buyers when you’re shopping for a home.

In hot markets, homes sell incredibly quickly, and sellers know they have an advantage over buyers. They have little reason to choose anything but the highest offer and know they can sell quickly, even if they turn away a few offers.

If you have a prequalification or preapproval, sellers know you’re serious about buying a home. It also shows you’ve taken the first steps toward getting a mortgage. Going through the full borrowing process can take weeks, so having a head start and being able to close on a transaction sooner makes you more appealing to sellers.

Even if you live in a real estate market that’s on the slower side, prequalification and preapproval are useful tools.

When a lender offers a prequalification letter, you get an estimate of the amount you can borrow. That lets you decide on the homes you want to look at and immediately know whether certain homes are out of your price range.

With a preapproval letter, you get a maximum loan amount and an interest rate. You can use that information to make a hard determination about whether you can afford a home. You can also calculate your monthly payments based on the amount you end up borrowing, giving you the chance to make projections for your monthly budget.

Both prequalification and preapproval get you started on the path toward getting a mortgage. If you’re serious about buying a home, you can only benefit from taking the first steps toward borrowing money, as it will save you time as you get closer to making your purchase.


Are You Guaranteed to Get a Loan If You’re Preapproved or Prequalified?

It’s important to remember you’re not guaranteed to get a loan even if you’re prequalified or preapproved.

Prequalification means relatively little when it comes to whether you can get a loan. The informality of the prequalification process means that banks take you at your word when you describe your finances and don’t spend much time looking into your background.

Even if you’re preapproved or prequalified, it’s possible a lender will deny your application after checking your credit or taking a closer look at your financial statements.

Preapproval means more than prequalification because lenders put far more effort into the process. Preapprovals include maximum loan amounts and rates, so they’re as good as an offer in many ways, but there are still things the lender wants to check before signing on the dotted line.

Once you find the home you want to buy and negotiate a deal with the seller, your lender has final steps to take toward due diligence — for example, hiring a home appraiser to inspect the home you’re buying and reporting back.

While you still owe money on your mortgage, your lender is effectively the owner of your property. The lender wants to make sure the property is worth the amount of money it’s paying on your behalf. If you make an offer that far exceeds the real estate’s value, it can still deny your loan.

Depending on what the appraiser sees, the bank may make you fulfill other conditions before finalizing your loan. You might need to hire someone to investigate a structural problem with the foundation or anything else that could threaten the integrity of the real estate or its value. Depending on how you negotiate, you may be able to have the seller pay for the appraiser and inspector.

Once you’ve satisfied all your lender’s concerns, the lender has to check your credit and financial profile one last time. It wants to make sure you haven’t borrowed a tremendous amount of money or gambled away all your cash in the time between your preapproval and making an offer on the home. If everything checks out, the loan goes through and you become a new homeowner.


How Can You Tell If You’re Prequalified or Preapproved?

It can be easy to get confused about prequalification and preapproval. The terms are similar, and they mean similar things. If you’re not sure whether you’ve been preapproved or prequalified, you can use a few rules of thumb to differentiate between them.

If the process you went through looks like this, you are probably prequalified:

  • Informal
  • Free
  • Estimates the amount you can borrow
  • No interest rate information provided
  • Minimal fact or background checking
  • Didn’t affect your credit

However, if the process you went through looks more like this, you are probably preapproved:

  • Formal
  • Often involves application fees
  • Maximum loan amount provided
  • Interest rate information provided
  • Your credit and financial statements closely checked
  • Affected your credit
  • You provided an estimate of your down payment

Should You Still Shop Around After Getting Prequalified or Preapproved?

When you’re applying for a loan, shopping around can save you a lot of money. Even a small difference in your loan’s interest rate can make a significant difference in the total cost.

When you prequalify for a loan, you’re starting a relationship with a potential lender, but there’s nothing that ties you to working with that lender. You can get prequalifications from multiple lenders if you want to get an idea of the loans each lender offers.

When you’re preapproved for a loan, you’ve put in a bit more effort working with a lender, but you still have not committed to using that lender. You can still shop around after getting a preapproval.

If you’re worried about damaging your credit with too many preapprovals, you don’t have to be. When a mortgage lender checks your credit, your credit score drops a few points. However, there is a 45-day grace period.

If you work with multiple mortgage lenders and they each check your credit within a 45-day window, your credit score only shows one credit check. That gives you the freedom to rate-shop without damaging your score.


Final Word

Getting prequalified or preapproved is a crucial step in getting a mortgage and buying a home, but sometimes, it can take a lot of work. Before you apply, have an idea of what you can afford and gather all the paperwork your lender might ask for. Being prepared can help the process go smoothly and help you look at houses you can afford rather than homes that are too expensive.

Getting prequalified and preapproved can also let you get a sense of how much you’ll pay for a mortgage, which is essential when building your new budget to account for the new costs you’ll take on by owning rather than renting.

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