“Mortgage Preapproval vs. Prequalification: Key Differences Explained”

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What Is Mortgage Preapproval?

Mortgage preapproval is a process that lets you and potential sellers know how much you are authorized to borrow to finance a home. By demonstrating your ability to close a deal, a mortgage preapproval letter can give you a strategic edge when you’re shopping in a competitive housing market.

Seeking preapproval from multiple lenders can also help you research which lender to work with when you’re ready to make a full mortgage application. Here’s how mortgage preapproval works.

What Is Mortgage Preapproval?

To obtain a mortgage preapproval, you’ll provide a lender with much the same information and documentation you’d submit with a mortgage application, such as proof of income (pay stubs or tax returns) and evidence of other financial assets (bank accounts, real estate holdings, investments, and the like).

Preapproval also requires consenting to a credit check and may require paying a fee. In return, the lender will provide a preapproval letter that indicates the sum it is willing to lend you to purchase a home. Other details will also be included, including the interest rate it foresees charging you for that loan, how long the letter is valid, and other important terms.

Submitting a preapproval letter along with your bid on a house can make your offer stand out from other bidders who’ll require loan approval before they can close on a sale, and can help put you on more even footing with rival buyers offering cash. In hot housing markets, bids without a preapproval won’t even be considered.

Mortgage Preapproval vs. Prequalification

If you’re seeking a mortgage, there’s a good chance you’ll encounter opportunities for mortgage prequalification. This is markedly different from mortgage preapproval, but the two processes can go hand-in-hand.

Mortgage prequalification provides an estimate of how much you might qualify to borrow from a given lender, and an estimated interest rate, based on answers to a few quick questions about your income, assets, and debts. It doesn’t guarantee that the lender will ultimately approve your loan application, but prequalification is quick and easy and has no impact on credit scores, so it can be a good way to narrow down the range of lenders from whom you’ll seek preapproval.

Mortgage preapproval is a more formal process. As noted, it requires completing a detailed application form and submission of documentation that backs your financial claims. It also requires review of your credit reports and scores, which typically causes a hard inquiry to be recorded on your credit report. Historically, lenders charged processing fees of several hundred dollars for preapprovals, but this practice has become fairly rare in recent years.

How to Get Preapproved for a Mortgage

Taking the following steps can help make your mortgage preapproval a smooth one, reducing the chance of unwelcome surprises.

1. Determine Your Budget

Decide how much you can offer as a down payment on your house, taking into account your savings and any financial gifts from family members. Then determine how much you want to spend on your new home.

Keep in mind that lenders may let borrowers with good credit put down as little as 3% of a home’s purchase price—making for a loan-to-value (LTV) ratio of 97%—but that a down payment of less than 20% of the purchase price means you’ll have to pay mortgage insurance premiums along with your monthly loan payments.

2. Check Your Credit Reports and Credit Scores

You can get free credit reports weekly from all three national credit bureaus (Experian, TransUnion, and Equifax) at AnnualCreditReport.com. Review each report carefully to make sure you fully understand its contents. If you see any information you believe is misattributed to you, including misreported late or missing payments, accounts in collection, or loan or credit card accounts that don’t belong to you, you have the right to dispute the information with the appropriate credit bureau.

Credit activity you don’t recognize may be a sign of credit fraud; if you believe you’ve been victimized, you should also report the matter to appropriate authorities.

Checking your credit score and understanding where it falls along the spectrum from exceptional to poor can help you anticipate how favorably lenders are likely to view your loan applications (or preapproval requests). You can get your FICO® Score free from Experian, and may be able to get scores elsewhere from a variety of sources.

3. Gather Appropriate Documentation

When you apply for mortgage preapproval, the lender will ask you to submit a number of documents it can use to verify and analyze your finances. These may include:

• Proof of identity: A driver’s license, passport, or other government-issued ID and your Social Security card.
• Proof of income: Pay stubs dating back eight weeks, two years of tax returns, W-2 or 1099 forms, and other evidence of earnings.
• Proof of assets: Provide copies of your two most recent bank statements and investment account summaries. If funds from family members will be used toward the home purchase, include gift letters.
• Proof of debt and expenses: Current loan and credit card bills (and rent, if you don’t have a mortgage) showing monthly payment amounts and outstanding debt balances.
• Down payment amount: You should be prepared to state how much cash you plan to use as a down payment on your home, and your asset declaration should show that you have that amount available.

4. Identify Potential Lenders

Mortgage prequalification may help you narrow down your list of potential lenders. You can also work with a mortgage broker who may be able to steer you toward lenders that specialize in loans you qualify for.

5. Submit Preapproval Applications

Visit potential lenders’ websites or call their mortgage departments to speak with a representative. Fill out an application form and submit electronic or hard-copy documentation as requested.

6. Obtain Your Preapproval Letters

Some lenders issue preapproval letters within minutes of receiving your application, while others may take up to 10 days. Once you receive a preapproval letter, you should include a copy of at least one with any offer letter you submit to a potential home seller.

Frequently Asked Questions

• How Long Does a Mortgage Preapproval Last?
• How Far in Advance Should I Get Preapproved for a Mortgage?
• How Long Does It Take to Get a Mortgage Preapproval?
• How Does a Mortgage Preapproval Affect My Credit?
• Should I Get Preapproved With Multiple Lenders?

The Bottom Line

Mortgage preapproval is an important step in the home-shopping process. It gives you a good idea of the loan amounts and interest charges you can expect from one or more lenders, and it lets you show potential home sellers that you’re able to move forward on a sale.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you every step of the way!

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