What is the Difference Between Mortgage Preapproval vs. Prequalification
When you decide to buy a home, you’ll have to go through an extensive lending process. For many homebuyers, this can be unfamiliar territory, leaving you with questions about the difference between mortgage preapproval vs. prequalification.
But this work is important because the approval process will help you and your lender determine your ideal price range. Here’s what you need to know about the preapproval process and how it differs from prequalification.
How Does a Mortgage Preapproval Work?
Technically speaking, mortgage preapproval and mortgage prequalification are both types of mortgage approval. In fact, it’s not unusual to hear some lenders use the terms interchangeably.
But the main difference is that during the preapproval process, your mortgage lender will perform a fairly deep dive into your financial information to assess your overall situation.
The preapproval process looks different from lender to lender. Typically, you’ll need to submit a formal loan application and provide details such as:
- Your household income
- Your savings
- Your existing debt (e.g., credit cards or student loans)
- Your personal credit score
To accomplish this, you’ll typically need to present tax returns from the past two years, as well as bank statements, pay stubs, and other documentation. The lender will evaluate this information to determine the type of loan you can receive as well as the interest rate and terms.
This process is usually quite fast, and many homebuyers receive a preapproval letter in a matter of days. However, your loan terms are not official just yet.
Preapproval won’t become official until your loan goes through underwriting and receives final approval from the lender. It’s not uncommon for lenders to adjust loan terms if there are errors or discrepancies in your financial data.
How Does Prequalification Work?
What, then, is the difference between preapproval vs. prequalification? The prequalification process is usually much simpler and doesn’t require any sort of formal application or even a credit check.
Instead, homebuyers can receive a quick response from the lender, which gives them a general estimate of how much they may be eligible to borrow.
In this case, “may” is very much the operating term. This initial approval doesn’t carry the same weight as a viable approval and can’t be used to make an official offer on a home. If you do find a home after prequalifying, you’ll need to go through the preapproval process before the seller takes you seriously.
This reality is why you might consider preapproval vs. prequalification alone. Still, prequalification gives you a quick snapshot of your finances and can be a great start in the house-hunting process.
How Long Does Prequalification Last?
Since mortgage prequalification is a general estimate, it doesn’t have a formal expiration date like other types of communication with your lender. Remember: prequalification doesn’t enable you to make an offer on a home, nor can it be used in any formal way to secure actual financing.
Prequalification should therefore be thought of as a quick snapshot, highlighting your financial situation at the present moment in time. In order to keep moving through the lending process, you’ll need to move on to the preapproval process, which will involve a deeper evaluation of your credit history, finances, and other information.
In other words, prequalification is mainly a tool to help homebuyers and lenders gain a quick understanding of their financial prospects.
Suppose that you prequalify for a particular loan amount. In that case, you can think of this prequalification lasting only for a short duration, and even a month’s pause in your house hunting adventure might require you to get prequalified again to ensure you’re searching with the right information.
How Long Does Preapproval Last?
Your mortgage preapproval letter will only be valid for 30 to 90 days. After this window closes, your preapproval will expire. Keep in mind that the exact terms can vary between lenders, so if you’re concerned about a potentially narrow window of preapproval, ask the lender before entering into the process.
But time isn’t the only thing that can affect your preapproval letter. Other things can alter the terms of your initial approval, including:
- Major changes in your income or debts
- Changing jobs
- Altering your investments
- Depleting your savings
For most homebuyers, this means that you may want to wait to obtain preapproval until you’re ready to commit to the process of finding a home.
Will Preapproval Affect My Credit Score?
A mortgage preapproval involves a hard credit inquiry, which typically reduces your credit score. Fortunately, this credit check will only cause your score to dip by five points or so, but it’s still a factor to consider.
This check also means that you don’t want to let your preapproval letter expire since expiration means that reapplying will lower your credit score even further.
Similarly, you may want to limit the number of lenders you apply to when seeking preapproval. It’s always good to apply to around three different mortgage lenders so that you can compare rates and terms, but make sure to factor in the hit you’ll receive on your personal credit.
Prequalification doesn’t involve a hard credit inquiry. Therefore, it has no impact on your personal credit score. Still, make sure to check with your lender before seeking prequalification, as some lenders will use the terms preapproval and prequalification interchangeably.
When to Consider Preapproval vs. Prequalification
There are many times when homeowners need to seek official preapproval vs. prequalification alone. Prequalification is good for one simple reason: it gives you a general idea of your price range when you first start searching for a home.
But prequalification can also be limiting, as it can’t be used to make an offer or even to show sellers that you’re serious about a purchase. Preapproval is the better alternative under the following conditions:
- When you’re ready to buy a home
- When the real estate market is hot
- When you don’t expect your financial situation to change
Offering to buy a home is a major step, but preapproval can be a way to wade into the water and proceed with the best possible information.
Moving from Preapproval to Approval
You won’t move on from preapproval until you finally find your dream home. After submitting your offer to the bank for consideration, the property will be appraised and inspected.
If your lender is satisfied, it can proceed to final underwriting and approve your loan. Being preapproved usually helps the process move more smoothly since your financial information has already been submitted and reviewed.
Get Questions About Your Mortgage?
The mortgage lending process can be challenging, which is why CrossCountry Mortgage is here to help. Our experienced team can help you learn more about the approval process, so contact us today.