EMMA TOMSICH / AUGUST 12, 2021
If you’re familiar with the home buying process or have recently found the home of your dreams, you might know that you need to be approved for a mortgage before you can purchase a property.
In the mortgage approval process, a real estate buyer can get prequalified or preapproved for a mortgage loan. While you’ve probably already heard both of these terms, it’s important to define and distinguish them so you can be better prepared when getting a mortgage. We’ll break it down for you and explain what prequalified versus preapproved means so you can fly through the mortgage approval process, straight to your new home.
What Are Mortgage Prequalifications And Preapprovals?
Both prequalification and preapproval are very important steps in the home buying process. While some people use these terms interchangeably, it’s important for home buyers to understand the differences between the two.
Preapproval differs from prequalification in that it estimates the amount a lender will let you borrow based on documentation such as a W-2, pay stubs, bank statements and tax returns. Prequalification is a less formal, less precise estimate that occurs earlier in the mortgage process.
Let’s break it down even further.
Prequalification is the first step in the mortgage application process. It’s quick and can be done over the phone or online. Generally, it takes 1 – 3 days to get prequalified for a loan and receive your prequalification letter.
During mortgage prequalification, you’ll supply a bank or lender with all of your financial information, including debt, income and assets. The lender will also ask you about what you’re hoping to get out of your mortgage and will explain what your mortgage options might be. Then the lender will evaluate your financial information to estimate how much money you might receive.
It’s important to note that the prequalified amount of money may not be the actual amount you receive for the loan. During the prequalification process, the lender won’t look at your credit reports or do any in-depth digging. A more thorough investigation occurs during the mortgage preapproval process.
After getting prequalified for a mortgage loan, preapproval is your next step. Unlike the prequalification process, preapproval is much more detailed and in-depth.
In order to get preapproved for a loan, the borrower must fill out an official mortgage application. Along with the application, the borrower must also present the lender with extensive documentation needed for the credit and financial background checks. This documentation will include your W-2, pay stubs, bank statements and tax returns.
After reviewing and evaluating this information, the lender will tell the borrower how much money they are preapproved for. The lender will also talk to the borrower about interest rates, and maybe even lock in an interest rate then and there. But remember, the amount of money you are preapproved for might not be the guaranteed loan amount.
How To Get Prequalified
Now we’ll walk you through the steps of the prequalification process to get you even closer to mortgage approval. To be better prepared for this step, it’s important you know where and how to get prequalified, as well as what financial information lenders need from you to make an estimate.
Find Your Lender
Before you can officially begin the prequalification process, you first need to find a mortgage lender to work with. This can often be done remotely via phone or online.
Discuss Your Financial Profile
Next, you will meet with your mortgage lender to discuss your financial profile. It’s important to have necessary financial documentation with you at this time. In order to make an estimate, lenders need information regarding your debt, income and assets. For example, you can present pay stubs, bills and your credit score and reports. Each piece of information you present to the lender will contribute to the final estimate of how much money you’ll be able to borrow.
Get Your Quick Estimate
After presenting your financial information, your lender will give you an estimate of how much money you’ll be able to borrow. The estimate will indicate the next steps of the home buying process because it will decide various factors such as the interest rate and other mortgage options.
Request A Prequalification Letter
Finally, you’ll request a prequalification letter. This will summarize everything you and your lender discussed during prequalification. It will outline the estimated amount of money the lender is willing to let you borrow, but remember, it’s not a guaranteed loan offer. Nonetheless, it’s important you request and file a prequalification letter during this process.
How To Get Preapproved
After getting prequalified for a loan, you’ll begin the preapproval process. We’ll explain how the preapproval process works, and tell you where and how to get preapproved, and explain what financial information lenders need at this stage.
Complete An Official Mortgage Application
First, you need to find and complete an official mortgage application. A full application is necessary for preapproval. In addition, you must provide the mortgage lender with necessary documentation, including your W-2, pay stubs, bank statements and tax returns. Your credit score and report will also be thoroughly measured and evaluated during this stage.
Determine A More Precise Estimate And Interest Rate
Because the mortgage preapproval process is much more in-depth and official than prequalification, you’ll receive a more accurate and precise interest rate in the preapproval stage. It’s important that you understand your estimated interest rate during this stage because it can say a lot about your rate in the final mortgage.
Get Your Preapproval Letter
Similar to prequalification, you’ll also receive a finalized letter at the end of the preapproval process. However, this letter is different from the prequalification letter. The preapproval letter will include the amount of money that the lender has preapproved for you, as well as what your interest rate might be. The preapproval letter is more official than the prequalification letter because the process is more detailed and requires more documentation. Getting this letter will show the seller that you’re a serious buyer.
Choosing Your Mortgage Strategy
Now that you’re beginning the mortgage approval process, let’s discuss how you should decide whether to pursue prequalification or preapproval.
Do You Need Both Approvals?
As a home buyer, you do have the option to go through both the prequalification and preapproval processes. It is common for home buyers to get prequalified before getting a preapproval.
However, in some cases it’s appropriate for a buyer to skip over the prequalification process and go straight to preapproval. For example, this might occur when a buyer is set on a specific house, has their documentation ready, and is prepared to take out the loan and purchase the house as soon as possible.
What Should You Ask Your Lender?
When going through the mortgage approval process, it’s important to determine exactly how each lender defines prequalified versus preapproved. To get a better understanding of how lenders interpret these terms, don’t be afraid to ask multiple questions. You can inquire about the mortgage loan terms and interest rate, or just get more clarification about prequalification and preapproval.
Beyond Prequalification and Preapproval
Remember, prequalification and preapproval are estimates, not guarantees, for loans. Once you are prequalified or preapproved, you will move onto the next steps of the mortgage approval process and the processes that come afterward, including expiration dates, home buyer certification and securing a mortgage.