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Mortgage Prequalification vs. Pre-Approval: What Each Means

By Stephen Sellner | Citizens Bank Staff

Before you can make an offer on a home, you need to prove to a seller or real estate agent that you can afford it. That’s where mortgage prequalification and pre-approval come into play.

However, the use of these terms can vary from one lender to the next, and some lenders might offer one and not the other.

Let’s make sense of all this by outlining the various ways lenders prequalify or pre-approve borrowers, and why it’s important to ask your lender about their specific process.

What is mortgage prequalification?

Lenders may use prequalification to describe an informal conversation — usually over the phone — between you (the applicant) and a loan officer. During this conversation, you’ll provide some basic information about your income, savings, debt, and credit score. The loan officer uses that information to provide a general idea of how much you may be able to borrow, based on their knowledge of lending products and guidelines. Think of this as a ballpark estimate.

Next, before you can shop for houses, your real estate agent will likely ask you to obtain a letter from your lender. The letter outlines how much the lender would be willing to lend you for the purchase of a home. That letter, once received, shows sellers and real estate agents how much financing you’re able to get to purchase a home.

To issue this letter, lenders take the prequalification process one step further. They’ll check your credit report and enter your income and asset information into an automated underwriting system. The system tells the loan officer the maximum mortgage you could qualify for. The lender will issue you a letter stating this prequalified amount based on the current interest rate environment and unverified information you gave them.

So, what is mortgage pre-approval?

Getting a mortgage pre-approval involves a full review by a lender’s underwriting department. Underwriters review loan files to determine how risky it might be to lend money to applicants.

The lender will conduct a hard credit pull. You’ll provide your W2s, bank statements, and other documents needed for a loan application. These documents are used by the lender’s underwriter to verify the information you provide in order to pre-approve you for a loan based on your complete financial profile.

At that point, the only thing left for the underwriter to do is review the property appraisal to ensure the home you want to buy meets any remaining underwriting requirements, such as property condition and value.

Like the more formal prequalification process, you’ll receive a letter to prove you can get financing to support your offer.

Is there ever a time when prequalification and/or pre-approval aren’t needed?

If you’ll need a mortgage for your home, it’s smart to get prequalified or pre-approved. Most real estate agents will require this as a first step in the home buying process; that way, they know ahead of time what listings to show you and that you can make a viable offer on a home purchase.

Since lenders usually check your credit before issuing a letter, it can also be a good way to identify possible problems with your credit before it’s too late.

What to remember

The differences between prequalification and pre-approval are very minor, and many lenders may use the terms interchangeably. That’s why it’s important to understand the lender’s process when requesting a letter. Be sure to ask:

  • Will the lender check your credit?
  • What documentation will you need to provide?
  • For how long will the letter be valid?
  • What assumptions were used to issue the letter?
  • What changes to your financial situation, if any, might create issues with your prequalification/pre-approval down the road?

Remember that neither the pre-approval letter nor the prequalification letter is a guaranteed loan offer. Furthermore, receiving a letter from a lender doesn’t mean you’re obligated to use them. You will still need to apply for a mortgage when the time comes to get your financing.

Are you ready to take the next step?

Get started on your path to homeownership. To learn more about our process and to find out how much you may be able to borrow for your home purchase, talk with a Citizens Bank loan officer.

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