Mortgage Pre-Qualification vs. Preapproval

What is mortgage prequalification?

Mortgage prequalification is one of the first steps you can take in the journey to homeownership. When you receive mortgage prequalification, you learn how much money you might be able to borrow for a home. The lender decides this amount based on your finances and the results of a soft credit check, which doesn't affect your credit score.

Prequalification is especially useful if you're a first-time homebuyer since it can help you gain access to information about your various mortgage options. This is also the time to work with a lender to find out which mortgage is most likely to meet your needs and fit your goals both now and in the future.

How does mortgage prequalification work?

Prequalifying focuses on personal financial data that you submit of your own accord. This can make it a helpful step in learning about your options, but make sure you provide accurate details to ensure your estimate is correct.

The lender will review your financial information and estimate the amount you may be eligible to borrow to purchase a home. Since this is a more informal part of the process, it’s often done online or over the phone and typically has no associated fees. It can be valuable, though since many sellers want to see a prequalification before moving to the next steps.

» LEARN MORE: What credit score is needed to buy a house?

What is mortgage preapproval?

A mortgage preapproval is a more in-depth process than a prequalification. At this step in the process, you confirm that you have the required credit, income and other qualifications to buy a home. This process helps ensure that when you find the home of your dreams, you have the opportunity to purchase it.

How does mortgage preapproval work?

An offer letter from your lender is typically good for 60 to 90 days.

The preapproval step occurs after prequalification. You will fill out a mortgage application, and your lender will verify the information's accuracy. Be prepared to provide financial documents, including recent pay stubs, tax returns and bank statements. At this time, the lender will also perform a hard credit check.

If you’re preapproved, you’ll receive a letter alerting you of this. This is known as an offer letter and it shows the interest rate, how much money you can borrow from the lender and other important details. The offer letter is typically good for 60 to 90 days.

» MORE: How long does mortgage preapproval take?

Prequalification vs. preapproval: a comparison

Prequalification is the first step for anyone who’s considering purchasing a home, while preapproval is for someone further along in the buying process. Both processes can give you insight into how much you can spend on a home. Below are some of the differences between mortgage prequalification and preapproval.

Bottom line: Do you have to get prequalified first?

Prequalification isn’t required to purchase a home, but it can be helpful — it’s a quick process that requires no credit check or excessive digging into your finances, and it shows you how much you might be able to borrow. In comparison, preapproval puts you more firmly on the road toward owning a home. At this step, lenders can provide more specific loan details, including your interest rate, and you can compare lenders to find the right one for your circumstances.

If you’re early enough in your home search, it can be smart to complete both prequalification and preapproval, both of which can give you an idea of how much you can afford to spend on a house before starting your search. Remember, a preapproval letter lasts for around 60 to 90 days, so only seek preapproval when you’re ready to make an offer.