Pre-Qualified vs. Pre-Approved: Your Key to Homeownership Success 

As you embark on your homebuying journey, you'll encounter two terms that can seem interchangeable: prequalification and preapproval. While they sound similar, understanding the nuances between these statuses can make all the difference in your mortgage application process.

Why It Matters

Prequalification and preapproval provide lenders with an estimate of your borrowing capacity. They are valuable steps in the mortgage approval process, indicating your financial readiness and enhancing your credibility as a homebuyer. While preapproval and prequalification sound similar, they serve very different purposes. At its simplest, a preapproval checks your financial readiness to make a home purchase, while a preapproval is a commitment from a lender for a home loan. Let’s deep dive into each one.

The Prequalification Quick Check-Up

Prequalification is a preliminary estimate of how much you can borrow, based on information you provide to a lender. It's a quick, simple process that typically involves sharing your income, debt, and assets. Essentially, prequalification is an in-depth budget check to help you get real about how much you can afford to borrow. It is not a loan application, simply a financial health check-up. 

Prequalification can also give you a better idea of the home loan options available to you before you need to make a final decision. Since it is based solely on your self-reported information, it does not guarantee you a loan offer. On the other hand, it also won’t impact your credit because it does not require a “hard inquiry” that can potentially ding your credit score. 

When to Prequalify

If you’re just getting started on your homebuying adventure, a prequalification is a great place to begin. It will give you some general guidelines as to your potential budget and can also show any potential sellers that you’re serious, giving you a foot in the door on your dream home. 

While prequalifying has several benefits, it’s not a vital step in the home buying process.  If you have a strong grasp of your current financial situation and how much you can reasonably expect to afford, it’s possible to skip prequalification and go straight to preapproval.

The Preapproval Deep Dive

Preapproval is a more comprehensive process that involves a formal application and thorough verification of your financial history. Your lender will request documentation of your financial status, such as pay stubs, tax returns, bank statements, and a credit report. 

By verifying your income, assets, and debts, preapproval establishes a more precise borrowing limit, allowing you to zero in on the precise range of properties you are likely to be able to afford. It can also give you a head start in a competitive housing market because it shows you are a serious buyer. 

When to Preapprove

The preapproval process is most useful for when you’re seriously looking at properties and ready to buy. While preapproval requires more effort than prequalification, it demonstrates your financial commitment and readiness to buy a home. Most preapproval letters are only good for a limited time, generally between 30 and 90 days, so keep this in mind as you shop. 

Points to Remember

While both options are valuable steps in your search for a home, there are some important considerations to keep in mind: 

  • Neither prequalification nor preapproval is a guarantee of a home loan. You will still need to go through the full mortgage approval process if your offer on a house is accepted. 
  • Be especially careful with your credit during the home buying process. If you fail to make timely payments on your credit cards or other loans during this time, your lender may not approve your mortgage.
  • If you have any major life changes coming up, for example, you’re hoping to change jobs or purchase a new vehicle in the near future, it’s a good idea to adjust your timing so they don’t overlap with your home purchase. 

 Changes to your income and fluctuations in your credit can both signal to a lender that you’re a credit risk—and affect your mortgage approval. 

Prepare to Own Your Home

Understanding the differences between prequalification and preapproval empowers you to make informed decisions during the home buying process. Whether you choose to prequalify and preapprove, or just go straight for preapproval, you'll increase your chances of securing the mortgage you need to own the home you've always dreamed of.

There are a number of additional resources and online tools available to assist homebuyers throughout this journey. Visit the U.S. Department of Housing and Urban Development for a step-by-step guide to buying a home. You’ll find a variety of options for home buying assistance at USA.gov’s website. You can also stop in today or call us to talk to a loan officer. We’d love to help you get started on your home buying journey!