Home Loan Preapproval vs. Prequalification
Homebuyers often get confused about the difference between preapproval and prequalification. Both can be helpful steps in the home buying process, but there are a few key differences.
- Prequalification is an informal review of your finances and credit that determines if you would potentially qualify for a home loan
- A prequalification can also provide a rough estimate of how much home you may be able to afford
- To get prequalified, you provide only basic information about your credit, debts, income and assets
- You usually don’t need to provide documents to get prequalified
- Online calculators may provide the same estimated qualification information
- Preapprovals are a more formal review of your finances and credit, and how much house you can afford
- You’ll need to provide documents like tax returns, pay stubs, and account statements to a lender to get preapproved
- Your lender will also check your credit history for a preapproval
- After your information is processed, your lender will give you a preapproval letter
- The preapproval letter shows real estate agents and sellers that you have financing available and are serious about purchasing a home
Because a prequalification is only an estimate based on self-reported information, a preapproval is often a better choice for potential buyers. Once you find your perfect home, a preapproval may also make your offer more favorable to sellers because it shows you are working with a lender. A preapproval also helps speed up loan processing because you’ve already established a relationship with your lender and they have many of your documents on file.