MortgageMortgage Preapproval: Everything You Need to Know
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Mortgage Prequalification vs. Preapproval: Which Is Best for You?

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If you’re kicking the tires of homeownership, a mortgage prequalification letter gives you a lender’s best guess about how much you can borrow based on a quick review of your finances. However, if you’re serious about making an offer, a mortgage preapproval tells a seller you’re financially ready to buy because your lender has to vet your finances to provide a preapproval letter.

Understanding the difference between prequalifying for a mortgage and getting a preapproval will help you decide which one to choose.

What is a mortgage prequalification?

A mortgage prequalification is a lender’s estimate of the home loan amount you may qualify for based on an initial check of your monthly income and debts, your down payment funds and your best guess of what your credit score is. You’ll typically provide the information through an online loan application, a smartphone app, over the phone or in person.

What is a mortgage preapproval?

A mortgage preapproval is a lender’s assessment of the mortgage amount you qualify for based on a review of proof of your financial situation. Instead of taking your word, lenders usually request and review documents like paystubs, W-2s, and bank statements and pull a credit report to back up what you told them on your loan application. A mortgage preapproval usually carries more weight if you’re buying a home, because sellers (and their real estate agents) know you’ve shown your lender evidence you can repay the mortgage.

How a mortgage prequalification letter differs from a mortgage preapproval

At first glance, it might look like a mortgage preapproval and mortgage prequalification letter say the same thing. In most cases, the letter explains:

  • The loan program. This could be a fixed-rate or adjustable-rate mortgage, and whether it’s a program backed by a government agency (like FHA or VA) or a conventional loan.
  • The loan amount. Lenders guess this based on your earnings, total debt and how much you’re putting down.
  • The loan-to-value ratio. Called your LTV ratio for short, this figure is based on your down payment and represents how much of your home’s value you’re borrowing. The less you put down, the higher your LTV ratio is.
  • The loan term. This is the repayment period expressed in months or years. The most common terms are 30 years (360 months) or 15 years (180 months).
  • The rate you qualify for. The lender chooses this based primarily on your credit score, although a number of factors affect the rate you’re quoted.

You’ll see the differences when you read the fine print in each type of letter:

A mortgage prequalificationA mortgage preapproval
  • Is based on unverified information
  • Can’t be finalized until documents are provided
  • Doesn’t guarantee loan approval
  • Could change once information about your income, assets or credit is reviewed
  • Is based on verified information
  • Is based on a review of a credit report
  • Is usually good for 90 days after it’s issued
  • Won’t typically change unless information about your income, assets or credit changes

How do I prequalify for a home loan vs. get a preapproval?

To get the most accurate mortgage prequalification or preapproval, you’ll need to gather some information and documents before you contact a lender. Below is a checklist of what you’ll need to provide for each:

Mortgage prequalification informationMortgage preapproval information
  • Salary or hourly rate information
  • Best guess of average income past two years if you’re self-employed or earning variable income (like commissions or bonuses)
  • Copies of 30 days’ worth of paystubs
  • Last two years’ W-2s
  • Tax returns if you’re self-employed or receive variable income (like commissions or bonuses)
  • Best guess of your credit score
  • Authorization to allow the lender to obtain a credit report
  • Estimate of how much you’ve saved for a down payment
  • Bank statements for the most recent two months

THINGS TO KNOW

Ask your loan officer about extra preapproval or prequalification requirements if you’re considering a government-backed loan or need a jumbo loan (a loan for an amount above the current $726,200 conforming loan limit for single-family homes in most parts of the country). A few things you may run into:

  • FHA flip rules. Loans backed by the Federal Housing Administration (FHA) generally can’t be secured by a home that was bought and resold within the last 90 days. Your preapproval or prequalification letter may not be valid if you’re trying to buy a fix-and-flip home.
  • VA eligibility. Military borrowers looking for zero-down-payment loans backed by the U.S. Department of Veterans Affairs (VA) must provide proof they served long enough to be eligible and that they have enough entitlement for a new loan.
  • USDA income and location. Loans backed by the U.S. Department of Agriculture (USDA) allow no-down-payment financing for low- to moderate-income borrowers in designated rural areas. You may not be able to get a prequalification until the lender confirms your home is in a USDA-approved area.
  • Jumbo loans. If you need a jumbo loan to buy a home in an expensive area, lenders may only offer a mortgage preapproval option. The credit score and down payment requirements are often more stringent than standard loan programs, and they may require more upfront documentation to issue a mortgage preapproval letter.

How long does it take to get prequalified vs. preapproved?

A mortgage prequalification typically takes a matter of minutes after you’ve provided information to a loan officer. Because a mortgage preapproval requires the lender to review your financial documents, it can take a bit longer. However, many lender websites feature online application portals where you can upload your documents, have your credit run and get your mortgage preapproval in a matter of minutes.

THINGS TO KNOW

Faster is not always better when it comes to the mortgage prequalification or preapproval process. If you’re prequalifying for a mortgage, familiarize yourself with all the questions you’ll be asked on a Uniform Residential Loan Application (URLA) — it’s often the things you don’t tell the lender that can turn a preapproval into a loan denial. Some of those things include:

  • A cosigned student loan or car loan you’re obligated to
  • Alimony or child support you pay
  • A side hustle or self-employment that shows a loss on your tax returns
  • Large cash deposits into your bank account

Prequalified vs. preapproved: Which is better?

Deciding whether to get prequalified or preapproved depends on how committed you are to buying a home and how solid your finances are right now. The table below provides some guidance on which is better for your financial situation and homebuying goals.

A mortgage prequalification makes sense if:A mortgage preapproval makes sense if:
You’re not ready to buy a home yetYou’re ready to start house hunting and making offers
You want a ballpark idea of how much a mortgage you can getYou want a more precise idea of how much you qualify for
Your credit scores are in repair or you don’t know what they areYou’ve been managing your credit well and are ready to have your credit pulled
Your income fluctuates and you don’t know if you make enough to get preapprovedYour income is stable and has been consistent for the past two years
You’re still saving for a down paymentYou’ve saved up for a down payment

 

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