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Prequalified Vs. Preapproved: What’s The Difference?

Kevin Graham6-minute read
March 07, 2022

There are two terms that prospective home buyers frequently hear as they start the process of obtaining a mortgage: prequalification and preapproval. While both have their place, there are used for different things, and there’s one that will set you apart as you get ready to make an offer.

Let’s dig into the differences between the two and what you need to know to obtain one or both.

What Is A Prequalification Letter?

Even though a preapproval is likely your ultimate goal, you may start with a prequalification letter, which is a document developed by a lender after reviewing your financial history that provides an estimate of how much you can afford and how much they will potentially lend you.

To arrive at this amount, a lender will review your financial history, including your income, current debt and credit score, to determine if you are a good candidate for a mortgage and the size of mortgage payment you can afford given your unique financial situation.

How To Get Prequalified For A Home Loan

When you are ready to start your house hunt, you may start with a prequalification letter. This will be based on the information you give your lender, rather than any research they have done. Since they are not verifying the information you provide at this step, it is a relatively short process, taking about one to three days as you assemble the appropriate documents.

In practice, it means that if you tell them your salary is X and they use that number to calculate the amount of loan you may qualify to borrow. This can help you set your budget as you start to look at properties.

A prequalification usually lasts for 60 – 90 days. If you haven’t made an offer before then, you will need to resubmit your information.

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What Is A Preapproval Letter?

The basis of the prequalification letter is the information you provide. Since the lender hasn’t yet actually confirmed your salary, debt-to-income ratio, credit score and more, the prequalification represents a ballpark of how much you could qualify for.

But it’s not necessarily the amount that the lender will ultimately loan you. That’s why a prequalification is just the first step, which won’t necessarily help you as you make offers on properties.

What a home buyer needs is a preapproval letter, which is the official amount a lender says you are approved to borrow once you find that dream home. Through the preapproval process, they will check your background and your credit score, and verify your finances using tax returns, pay stubs and other documents to determine your exact financial picture.

They want to make sure you have a strong financial history that indicates you will responsibly pay back the loan. This due diligence will confirm the amount they are willing to loan you.

How To Get Preapproved For A Home Loan

To get preapproved for a home loan, you will need to fill out a form and supply information about your finances. The lender will then confirm what you submitted and determine if they will preapprove your loan, and for how much.

This step takes a bit more time as you’ll need to provide a variety of documents, such as:

  • 1040 tax returns
  • W-2s or 1099s
  • Pay stubs
  • Information on debts
  • Employment history
  • Employer contact information
  • Bank and investment account statements
  • Identification such as your driver’s license and Social Security number
  • Other financial details they request

What Is The Difference Between Preapproved And Prequalified?

While they sound the same, the difference is in the details. Prequalification is an estimate of how much you can afford, while preapproval gives you a better idea of how much you’re able to borrow (officially approved by the lender) as well as your interest rate so you can plan ahead for your budget.

Preapprovals are also known as a “hard credit pull” or check that will show up on your credit report. Because they do not examine your credit history, prequalifications do not show up on your credit report.

Why Does Getting Prequalified And Preapproved Matter?

The home buying process has many steps and becoming prequalified and preapproved is an important first one to take. Even if you’re just starting to explore options, it’s good to get prequalified so you have a better idea of what you ultimately can afford, which helps you target your home buying search.

Then once you’re ready to hunt in earnest and make offers, you should move along with the preapproval process. Especially in a hot market where properties are going fast, you need to show a seller that you are a serious prospect who will make the rest of the process easy.

That’s because when a seller is mulling multiple offers, they are in a position to choose the offer that appears most attractive to them. The preapproval assures them you actually can get the mortgage amount you need to buy the house, which means the closing process is liable to go a lot smoother. They don’t have to worry the deal might fall through because you don’t have access to the funds you expected.

The Bottom Line: Preapproval And Prequalification Aren’t The Same Thing

While they sound very similar, it’s vital to note the difference between the prequalification and preapproval processes. Prequalification is a great way to start to help set your budget and expectations about how much home you might eventually be able to buy. Once you start looking and anticipate making an offer, you’ll need to move forward with an official preapproval letter that means your financial information has been documented and verified.

While they are essentially both estimates of how much house you can afford, a preapproval letter holds more weight, which is why you’ll need one to move forward quickly in your home search.

If you’ve been turned down for preapproval or didn’t get approved for as much money as you’d hoped, there’s no reason to get discouraged. Taking some time to clean up your credit score and save for a larger down payment can approve your odds of preapproval.

If you’re ready to get started, get preapproved online now.

Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage he freelanced for various newspapers in the Metro Detroit area.