When you’re thinking about buying a home, two common terms you’ll encounter are prequalification and preapproval. While both play a key role in the homebuying process, they are not the same and serve different purposes. Knowing the difference can help you navigate your home purchase more effectively.
What’s Prequalification?
Prequalification is the first, informal step in the mortgage process. It’s a simple evaluation where you provide basic information about your financial situation—such as income, debts, and assets—to a lender. Based on this, the lender will give you an estimate of how much you might be able to borrow.
This process typically does not involve a full credit check, although some lenders might run a soft credit inquiry, which does not impact your credit score. Prequalification can happen over the phone, online, or in person, making it a quick way to get an idea of your mortgage options.
While prequalification helps you understand what you can afford, it does not guarantee loan approval. It’s more of an initial assessment that can guide you as you move forward in your home search.
What’s Preapproval?
Preapproval is a more thorough and formal process. To get preapproved, you will need to submit documentation that proves your financial history, including W-2 forms, pay stubs, tax returns, and bank statements. The lender will also perform a hard credit check, which can slightly lower your credit score.
With preapproval, the lender verifies your financial standing, including your income, employment status, debt, and assets. Once you’re preapproved, you’ll receive a letter from the lender outlining the mortgage amount you qualify for, along with the interest rate and terms. This preapproval letter is a powerful tool in the homebuying process—it shows sellers and real estate agents that you are serious and financially ready to buy.
Why It Matters
Both prequalification and preapproval are important steps, but they serve different purposes. Prequalification gives you a rough estimate of what you can borrow, which can help you start house hunting. Preapproval, on the other hand, carries more weight and can make you a more competitive buyer in the market.
If you’re considering buying a home, going through both steps will give you a clear understanding of your borrowing options and help your realtor guide you toward properties within your budget.
In short, while prequalification offers an estimate, preapproval provides the lender’s formal commitment to lend you a specific amount, making it a crucial step in your path to homeownership.
