When you are planning to buy a home, you will first need to get prequalified or preapproved for a mortgage. But what’s the difference between the two? And which one should you get?
Here’s a breakdown of what you need to know.
What is a Mortgage Prequalification?
During the prequalification phase of applying for a mortgage, you will start by discussing your credit, debt, income, and assets with a mortgage broker. Application processes do differ somewhat by the broker. Still, usually, your broker will be able to give you an idea of how much you might be able to borrow based on your entire financial situation.
A prequalification usually does not involve a credit check. This is important to note, since while a soft inquiry does not affect your credit score, a hard inquiry does. This can cause a temporary drop by a few points of your credit score. Though the effect will be minor, and most credit reporting agencies treat numerous hard inquiries in a very short period of rate-shopping as a single query, it’s essential to limit the number of hard inquiries that take place.
While a preapproval typically requires a credit check to verify your financial picture, a prequalification relies primarily on self-reported information. You won’t have to submit documentation of your assets so while it is less reliable than a preapproval, it will give you a ballpark estimate of how much you can borrow.
Therefore, it is important to be as honest and accurate as possible when submitting this self-reported information. Doing so will give you the best and clearest idea of how much you can afford to borrow – though again, everything will be formally checked later on, in the preapproval process.
The prequalification process can be done online, over the phone, or in person. It will give you an idea of your financial readiness and present you with a variety of mortgage options. This is considered the initial first step for homebuyers, particularly first-time buyers who are just starting to explore the possibility of buying a home.
What is a Mortgage Preapproval?
A mortgage preapproval is a process that is often confused with a prequalification, but know this – they are not one and the same.
A preapproval is more comprehensive than a prequalification, and involves a thorough examination of your income, credit history, assets, debts, and more. Your mortgage broker will verify all the information and documents you have provided to make sure everything is accurate.
You will attach the preapproval letter to your offers to show sellers that you can afford the home.
What Do You Need for a Mortgage Preapproval?
To get prequalified for a mortgage, you don’t need to do much of anything at all. In some cases, you may have to provide your Social Security Number for a credit check, but that’s it.
A mortgage preapproval is more extensive, though certainly not stress-inducing by any means. You will just need to do a bit of prep work ahead of time.
You’ll need to give your mortgage broker the following documents:
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- Income and Employment Documentation: This might include pay stubs, W-2 forms from the last two years, and two years of federal income tax returns. If you’re retired, self-employed, or have other unique employment situations, you may have to provide additional documents like benefit award letters and 1099 forms.
- Asset Validation: These documents will cover all of your accounts for the last two months, including savings, checking, stocks, Roth IRA, and 401(k) documents. You will need to make sure your bank’s name, your name, and the account number are clearly visible in the statements.
- Gift Letter (in some cases): If a family member is supporting you with your down payment, you will need a gift letter (signed and dated) from the individual who is assisting you.
- Identity Documents: You’ll need to provide a driver’s license and your Social Security Number.
Finally, the mortgage broker will also perform a credit check. You won’t have to submit anything for this – just your Social Security Number. Unlike the prequalification process, in which a soft credit check is standard, for the mortgage preapproval process, you should expect a hard inquiry.
How Long Does it Take to Get Preapproved for a Mortgage?
Once your documentation is in order, you can get a mortgage preapproval pretty quickly afterward, usually within 1 to 2 business days.
The exception to this is if you have a high debt load or a bad credit score – this may cause a significant delay in getting preapproved, sometimes as long as several months.
When is the Best Time to Get Preapproved for a Mortgage?
Wait to get prequalified or preapproved for a mortgage until you’re ready to start the house-hunting process. This isn’t something you should do “just because” – again, it could impact your credit.
One thing that’s important to note is that getting prequalified might not even be necessary. In fact, if you’re ready to start shopping, you can skip the prequalification process and go right to preapproval.
What Is the Difference Between Prequalified and Preapproved?
The two terms sound identical, but the distinction is in the fine print.
Prequalification gives an estimate of how much home you can afford. That’s it.
Preapproval gives you and the mortgage broker a more defined and precise estimate of what you can borrow. It has the broker’s stamp of approval on it, verifying that you can afford the home you want to buy. It also gives an approximate interest rate, something that can help you budget more accurately and effectively down the line.
Preapprovals are sometimes referred to as credit checks or hard credit pulls because they do appear on your credit report. Most of the time, prequalifications are not recorded on the credit report since they do not closely analyze your credit history.
Are Preapprovals More Important Than Prequalifications?
A mortgage prequalification is the first stage in obtaining a mortgage, and it provides you with an estimate of how much you can borrow. Because the prequalification procedure is short and simple, it can help you get started, create momentum, and begin working with a mortgage broker.
You get preapproved when you know you’re ready to buy a house. In fact, if you want to be taken seriously as a homebuyer, you must have a preapproval letter. Sellers and real estate agents take you seriously if you’re preapproved – and your offer will be more competitive if you have that preapproval letter in hand when you’re ready to buy.
If you’re in the market for a new home, it’s essential to understand the difference between a preapproval and a prequalification. While both are important, preapproval is the most important part of applying for a mortgage – and fortunately, getting preapproved is much easier (and faster!) than it sounds.
