Mortgage prequalification vs. preapproval: What each means

Mortgage prequalification is a quick, informal estimate of how much you could borrow based on self-reported financial information. Mortgage preapproval is more rigorous, where a lender verifies your income, assets and debts, then runs a credit check and issues a letter stating the loan amount you'd likely qualify for. While the terms are often used interchangeably, preapproval carries more weight with sellers and real estate agents because it's backed by verified financial documentation.

You've got a down payment saved up, and you're ready to take the plunge and buy a home. Before you start touring houses with an agent or making offers, you need to prove that you can afford to make the purchase. It's time to talk to a lender about getting prequalification or preapproval for a mortgage.

Although people often use the two terms interchangeably, they are not the same. In a competitive housing market, securing a preapproval rather than a prequalification can mean the difference between getting your offer accepted and losing the home.

As you start your homebuying journey, explore the prequalification vs. preapproval processes, when you need them and what you should ask your lender about getting a mortgage.

What is mortgage prequalification?

Mortgage prequalification is an estimate from a lender of how much you can afford to pay for a house. It's based on a self-reported snapshot of your financial situation, including your income, savings and other assets. At this stage, the lender won't ask for supporting documents, such as bank statements or tax returns, and typically won't run a credit check.

To get prequalified by a lender, you'll need to provide financial information that includes:

• Income: How much income you make from all sources
• Debts: How much debt you have, such as credit cards, student loans or car loans
• Assets: How much you have saved or invested
• Employment status: Whether you're employed full-time, part-time or self-employed, and how long you've had your current job

Mortgage prequalification takes just a few minutes and can be done over the phone or online. The lender will give you a prequalification letter at the end, which can signal your general eligibility for a mortgage, but isn't a commitment from the lender.

While it may not be strong enough to help you stand out in a seller's market, completing the prequalification process can clue you in to any strengths or weaknesses you have as a potential buyer. You may find you have too much debt compared to your income or that you'd be better off saving even more for a down payment.

What is mortgage preapproval?

Mortgage preapproval is a formal statement from a lender stating exactly how much money you can borrow, the mortgage term and the interest rate based on a thorough review of your financial information. It's a step up from prequalification and shows sellers you are ready to make serious offers.

While self-reporting your financial information was sufficient for prequalification, to get preapproved for a mortgage, you'll need to provide supporting documentation. Be prepared to show a lender the following:

• Proof of income: W-2s and pay stubs if you're employed or tax returns if you're self-employed
• Proof of savings and assets: Several months' worth of bank or investment statements to verify you have the down payment
• Proof of debts: Documentation showing how much you owe in debts and your monthly payments
• Social Security number: Your SSN so the lender can run a hard credit check

Since preapproval does involve a credit check, your credit score will take a small hit. However, the drop usually isn't big enough to be a cause for concern.

Once you get preapproved, the lender will provide you with a letter that includes:

• Maximum loan amount
• Estimated interest rate
• Potential loan programs or mortgage types

The preapproval letter has an expiration date, usually within 60 to 90 days. If you haven't found a home or had an offer accepted within that time frame, you'll start the process again.

Unlike prequalification, a preapproval letter signals to sellers and agents that you've been financially vetted and that you're likely able to get a mortgage should you put in an offer on a home. It gives you a competitive edge over other buyers, which can make a big difference in tight markets.

Are prequalification or preapproval always needed?

If you'd like to buy a home, but you're not sure whether you're financially ready, mortgage prequalification is a good first step. The prequalification process can let you know whether you're ready or need to focus on specific areas before you start looking at properties.

Once you're sure you're ready to buy, getting preapproved for a mortgage can give you and any potential sellers or agents the confidence that you'll likely be approved for a home loan.

Of course, you don’t always need prequalification or preapproval. If you're going to pay cash for a home or use another source of financing, such as a loan from a family member or friend, you don't need either one.

At a glance: Prequalification vs. preapproval

To determine which step aligns with your current homebuying stage, it helps to review a side-by-side comparison of prequalification and preapproval.