Prequalification comes first, and it’s usually a simpler, faster process than preapproval. The lender will ask you for basic financial information and quickly assess whether you might be a good candidate for a mortgage loan, personal loan, or event a credit card. Preapproval, on the other hand, requires a more thorough look at your financial situation. The lender will pull your credit report and give you a firm confirmation of the loan amount you can qualify for. Both processes can give you an idea of your loan prospects, as well as what you might be able to afford. The key difference is that a preapproval requires lender verification and is essentially a commitment to underwriting the loan (though definitely not a final approval just yet).
What Does Prequalified Mean?
For most lenders, getting prequalified is the first step toward a loan or line of credit. You’ll need to answer a few questions about your income, assets, debts, credit, and/or projected home purchase, and if you appear to meet the lender’s basic qualification standards, they’ll give you an estimate of how much you can afford. Since you don’t need to submit any documents, you can usually complete this process over the phone or via an online form. The main point to emphasize here is that the lender is basing their prequalification on the information you provide. They’re not verifying your income or pulling your credit, which means your credit score won’t be affected. That all comes later, as part of the preapproval process.
What Does Preapproved Mean?
Preapproval is a much more comprehensive evaluation of your financial standing. The lender will pull your credit report, and you’ll need to provide proof of income, such as W-2 forms and pay stubs, as well as documentation of other financial assets. Assuming you meet the lender’s eligibility requirements, you’ll get what’s known as a “preapproval letter.” A mortgage preapproval letter is often good for 90 days. After that, the lender may need to pull your credit report again. The letter should state how much you can borrow, and in many cases, the interest rate you can expect. If you’re looking to buy a home, you can use the preapproval letter to help guide your search. Consider including it in any purchase offers you submit as well. Sellers are often more confident in a bid when they see that a buyer is preapproved. In some cases, it may even help you win out over other buyers.
Prequalified vs. Preapproved
Preapproved vs. Prequalified: The Bottom Line
Both prequalification and preapproval are important steps in the borrowing or home buying process, but they’re not one and the same. While getting prequalified can give you a rough idea of what your loan options might look like, it’s not a commitment from a lender by any means. Preapproval will give you a solid idea of what you can afford as a borrower.
