NEW YORK — When it comes to buying a home, the terms “prequalified” and “preapproved” are often used interchangeably, but they’re not the same.
Getting prequalified for a mortgage is an informal first step that’s meant to give potential homebuyers a rough idea of what they can afford. It can typically be done over the phone or online and relies on self-reported financial information.
By comparison, the preapproval process is more involved and requires lenders to do a deep dive into your finances.
Once that review is complete, you’ll receive a letter showing you’ve been preapproved for a mortgage loan up to a specific amount. It’s not a final agreement, but it proves to sellers that you can follow through on an offer.
Here’s what to know about getting prequalified versus preapproved for a mortgage.
What does prequalified mean?
Prequalification is a way for potential homebuyers to figure out how much house they can afford. It’s an informal process where prospective buyers give lenders a sense of their overall financial situation.
Typically, buyers will provide their income information and, in some cases, undergo a soft credit check, which doesn’t affect their credit score. The lender then reviews everything and gives borrowers a general idea of how much they’ll be approved for.
There’s no need to fill out a mortgage application or pay an application fee, and you won’t have to provide documents to validate your financial info.
Prequalification is seen as a first step in the mortgage process and can be done online.
According to a Zillow survey, about a quarter of prospective buyers who have not yet started working with an agent reported getting prequalified (27%).
What are the benefits of prequalification?
Prequalifying doesn’t guarantee you’ll be approved for a specific loan amount, but it can help homebuyers set a budget and narrow their options.
It’s also a way for potential buyers to start a conversation with lenders so they can better understand the mortgage process.
Once prequalified, you’ll usually receive a letter that you can show to an agent or seller as proof you’re working with a lender.
What does preapproval mean?
The preapproval process typically comes after prequalification and is much more involved. It’s a formal way for lenders to gauge your financial situation and determine how big a mortgage you can afford.
Bank of America explains it like this: “Preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place.”
To get preapproved, borrowers need to fill out a mortgage application and provide documented proof of their finances like bank statements and paystubs. Lenders will also run a credit check.
Once preapproved, you’ll get a letter outlining the maximum loan amount the lender thinks you can take on. It’s an offer to loan you that amount but not a firm commitment. Most approvals last a maximum of 90 days, but that varies across lenders, according to Experian.
What are the benefits of preapproval?
Getting preapproved is a way to show sellers you’re serious about buying a home — a significant advantage in a competitive housing market.
While it’s not mandatory, real estate agents often prefer that buyers have a mortgage preapproval letter before showing them homes.
According to Zillow’s 2022 Consumer Housing Trends Report, 85% of sellers said that they prefer to accept an offer from a buyer that is preapproved.
It’s also possible to get preapproved with more than one lender. Research from Freddie Mac found homebuyers could have saved up to $1,200 annually by getting four quotes. However, the report notes there is some credit score risk when applying for several mortgages in a short span.
Which one is better for me?
If you’re just starting to think about buying a home, then getting prequalified is an easy step to get the ball rolling. You’ll get a general sense of how much you may be able to borrow in a quick, hassle-free way.
But if you already know you’re ready to buy a home, then you could be better off skipping ahead to preapproval. You don’t need a prequalification to get preapproved.
It’s important to remember that preapproval letters expire, so make sure you’re ready to search for a home and make an offer.
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