You've been saving money and looking at properties, and now you're ready to buy a home. Before you start making offers, however, you'll want to be able to prove to a seller or real estate agent that you can afford it. That's where mortgage prequalification and preapproval come into play.
These terms may sound and seem similar, even interchangeable, but being either prequalified or preapproved for a loan signals different things to the seller or agent. Plus, lenders sometimes offer one and not the other.
As you start the homebuying journey, here's what to know about the prequalification vs. preapproval processes, including why they're needed and their differences as well as what you should ask your lender about getting a mortgage.
You can think of prequalification as a meet-and-greet for you and the mortgage lender. You'll share basic details about your financial situation with them, such as how much you make, how much you owe, what you have saved and what other assets you have. At the prequalification stage, the lender usually takes what you say at face value and usually won't run a credit check or ask for proof.
The lender will then tell you about the mortgages they offer and how they like to operate. Based on your self-reported info, they'll consider if you'd be likely to meet their qualifications and requirements for a loan. If so, they'll give you a projection of how much you could borrow. You'll typically get a determination right away. Some lenders will even give you a prequalification letter you can show to a real estate agent to identify your ideal house-hunting price range.
The prequalification process is a preliminary step, so you and the lender aren't yet committed to each other. Some people use it to get an idea of how much house they should be shopping for and to test the waters before seeking preapproval or applying for a mortgage.
If prequalification is like a first meet-up, consider preapproval as getting to know each other better. At this stage, you're ready to have a lender help you prove to sellers and agents that you're serious about buying a home.
The preapproval process is more involved than prequalification. You'll have to provide several supporting documents that may include proof of income (such as a W-2), statements of your assets (such as your bank statements and other account holdings) and records of your debts (such as student loans and credit cards). The lender likely will also check your credit report and score.
The lender uses all of this information to assess your financial profile and determine how risky it might be to lend you money. Sometimes they make a determination while you wait, but it can also take a few days. If your finances check out, you'll be given a preapproval letter that outlines the mortgage you'd likely get, including the interest rate, amount and term. When you're ready to make an offer on a home, the sellers or the agent will want to see your preapproval letter to make sure you have the funds ready for the deal to go through.
Keep in mind that mortgage preapproval still doesn't mean total commitment. In fact, you might want to play the field and get a few competitive options. Because the preapproval process can involve a credit check, you may limit it to a select few, but it's not a bad idea to shop around.
You may not need prequalification or preapproval in some cases. It's possible to be in a situation where you don't need a loan to buy a home or you're securing the funds from somewhere else, like a family member or the sale of another property. You may even have an informal arrangement where the sellers are OK with making a deal based on trust that you can pay them.
But generally, if you'll need to borrow money from a financer to buy a home, getting prequalified or preapproved for a mortgage can be useful. Most real estate agents require it as a first step in the homebuying process so they know what listings to show you and how much you have available for making a viable offer.
Prequalification | Preapproval |
---|---|
Income, debts and assets are self-reported | Must provide proof of income, debts and assets |
Credit check optional | Credit check required |
Gives an idea of how much home you can afford | Gives mortgage loan details including amount, interest rate and term |
Takes a few minutes to complete | Takes 30 minutes to 1 hour to complete |
Determination given immediately | Determination may be immediate or take a few days |
Won't convince agents or sellers you're a serious buyer | Can help agents and sellers believe you're a serious buyer |
Although prequalification and preapproval are different, many people use the terms interchangeably. That's why it's important to be able to recognize which one you're facing. As you go through the mortgage approval process, make sure you get the answers to these questions:
Will you be doing a credit check?
Lenders often don't do a credit check for prequalification, but some do. For preapproval, a "hard inquiry" credit check is standard. Getting your credit checked usually impacts your credit score, so you'll want to know if it's happening.
What documentation do you need?
The documentation you need will depend on your financial situation and the lender's policies. Some require copies of your tax return or your W-2 while others may accept your latest pay stub. Certain lenders may want to review all your account statements while others are content with proof that you could make a down payment.
How long is my prequalification or preapproval valid?
Most prequalifications or preapprovals expire after a few months, so ask your lender exactly how long it's good for. You'll also want to find out if they'll agree to automatically preapprove you again at that time or if they'll require updated documentation or a new credit history check.
What might create issues with getting a mortgage?
Ask what events would affect the lender's prequalification or preapproval when you officially apply for a mortgage. In most cases, lenders advise against making any major purchases, applying for other loans or credit cards and changing jobs before closing on a house. All of these can change your financial profile, which can change the lender's mortgage terms.
If you're looking at houses but not yet committed to buying, prequalification is probably the better route for now. When you're more sure that you're about to buy, go for a preapproval. Remember that neither prequalification nor preapproval is a guaranteed home loan offer. Receiving them from a lender also doesn't mean you're obligated to use them. You won't officially apply and be approved for a mortgage until you and the seller or agent have landed on an agreeable offer.
If you're ready to get started on your path to homeownership, consider learning more about the mortgage process at Citizens. To find out how much you may be able to borrow for your home purchase, connect with a Citizens loan officer.
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Mortgages are offered and originated by Citizens Bank, N.A. (NMLS ID 433960).
Disclaimer: The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.