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Pre-Approved vs. Pre-Qualified: Which is Right for Your Loan?

When it comes to getting a mortgage loan, terms are confusing. Are you preapproved or prequalified? While these words sound similar, they have different meanings. Before you place an offer, it's important to know what the difference is — and what you need from the lender to make a solid offer.

 

Prequalified mortgage vs. preapproved mortgage

The differences between getting prequalified for a mortgage and preapproved for a mortgage come down to a few key things:

  • Whether or not you fill out a formal application.
  • Whether or not you pay a fee to complete the process.
  • Whether or not you need to provide proof of income and assets.
  • Whether or not the lender verifies the information you provide.
  • How the seller perceives you as a buyer.

 

Getting prequalified for a mortgage

Before you start shopping for a new home, you'll want to know how much you can afford. This is the question the prequalification process can answer for you.

Some banks will prequalify you by looking at your finances and giving you an idea of the highest loan amount you'll likely be approved for when you apply for a mortgage. The keyword here is “likely." You get prequalified by giving a lender your self-reported financial information online or by phone. This usually includes income, debt, assets, and the anticipated down payment.

The lender doesn't verify the information you provide. But they will make a credit inquiry to see what your credit score is.

The letter that the lender generates at the end of this process isn't a commitment for financing.

 

Getting preapproved for a mortgage

Getting preapproved for a mortgage is a more thorough process. The borrower completes a formal mortgage application and supporting documentation.

The lender will then:

  • Verify the information you provide.
  • Review your credit score by making a "hard" credit inquiry.1 (This does have some impact on your credit score.)
  • Perform a background check.

At the end of the process, the lender will provide the buyer with a preapproval letter. This letter states the highest amount the buyer could pay for a house given their available down payment plus the highest mortgage the bank would approve them for. These letters are typically valid for 30 to 60 days.2

While a preapproval letter is also not a guarantee of financing, it does provide a strong indication of your ability to be approved for your mortgage loan.

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In areas where multiple offers are common, a preapproval letter shows you're a serious buyer. You likely won't have your offer accepted without one.

Why is it important to get prequalified or preapproved?

Being prequalified before you start looking at properties is an important first step so that you don't waste time looking at (and potentially falling in love with) homes you can't afford. With expensive, high-end homes, some sellers require proof of prequalification before they will grant showings.

In a hot real estate market, including a preapproved loan letter is far better than including a prequalified loan letter. If a seller has multiple offers, they want to choose one with a low risk of falling through due to financing. A preapproval letter shows that you're a serious, vetted buyer with a high chance of securing financing.

 

What happens if you are denied a mortgage after preapproval?

It is not impossible that a bank will deny you a mortgage even after they've issued you a preapproval letter. First, a preapproval for a mortgage is based on the borrower's financial situation at the time of application. If the buyer loses their job, takes on substantial new debt, or stops making payments on existing loans and experiences a drop in their credit score, the lender can deny the loan during underwriting, which is the final approval process.

The loan offer is also contingent on the property appraising at or above the sales price. If an appraiser believes the home isn't worth the selling price, the bank can reject the loan. In this case, you have some options. You could provide a larger down payment that makes up the difference between what the house appraised for and your accepted offer. You could also ask the seller to drop the price of the home to match the appraisal. Or, you could go for a compromise, combining both of these options.

 

Are there any other options besides getting preapproved or prequalified for a loan?

Yes. You could make an offer without a prequalification or preapproval letter.3 However, these letters — especially a preapproval letter — let the seller know that you're a serious buyer and have a high chance of getting the financing you need to actually buy the house. This will greatly improve the chances that the seller will say "yes" to your offer. And in a hot market, they're essential for anyone who needs financing to buy a home.

Another option is to pay cash for your home. In this case, you wouldn't need a preapproval or prequalification letter from the bank. You would simply provide proof of funds documentation with your offer.

A new home is often the largest purchase you'll make and getting approved for a mortgage loan can help you realize the dream. Prequalification and preapproval letters can help make the process go as smoothly as possible.

 

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Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. "What Are Inquiries On Your Credit Report?" Experian, accessed August 3, 2021. Back
  2. Luke Daugherty, “Mortgage preapproval: Everything you need toknow to get preapproved," CNET, published May 28, 2021, accessed July 31, 2021. Back
  3. Adriana Velez, “Is a Mortgage Pre-Approval Letter Necessary To Make An Offer on a House?" Realtor.com, published January 4, 2019, accessed July 31, 2021. Back