If you’ve been researching a potential home purchase, then you’ve probably seen the terms pre-approval and prequalification thrown around. Though they might sound alike, they’re typically two different and important steps in the homebuying process.
What is mortgage prequalification?
A mortgage prequalification is essentially a rough estimate of how much mortgage you can qualify for, based on the information you provided the lender. It’s a good first step toward buying a home, as it gives you a general idea of what you might be able to afford.
If you’re not happy with the ballpark number you get prequalified for (or you’re turned down), you might want to step back, work on your credit score, or save up more cash before moving forward.
What is mortgage pre-approval?
A mortgage pre-approval comes with a full application and more verification. Instead of just taking your word for it, the lender will verify your credit score and other personal information. If it checks out, they’ll tell you how big a loan you can expect to be approved for.
They’ll also give you a letter confirming this amount, which you can then submit with any offers you make. Since pre-approval letters mean you’re one step closer to an approved loan, they can often help you stand out from other buyers, especially in a bidding war.
Learn More: Does Mortgage Pre-Approval Affect Your Credit Score?
How long does a prequalification and a pre-approval take?
Since prequalification requires only a few pieces of information, it’s the fastest option. If you opt for a lender with an online prequalification form, it typically takes just a minute or two to complete.
Pre-approvals, on the other hand, take a bit longer since the lender needs a more comprehensive look at your finances. You might also need to provide documentation of your income, assets, and other financial data.
Good to know: The exact amount of time it takes to submit and process your information depends on the lender. Traditional mortgage lenders say receiving a pre-approval letter can take up to 10 days. Some online lenders, however, can deliver them in minutes.
Requirements for a prequalification and pre-approval
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Who is prequalification for?
Generally, prequalification is best before you begin the home shopping process. You’ll use a lender’s prequalification form to gauge whether it’s a good time (financially) for you to buy a home and how much you might be able to afford.
Who is preapproval for?
A pre-approval is best reserved for serious homebuyers. If you’ve done your research, prepped your finances, and you’re ready to start shopping for homes, you’ll want a pre-approval in hand to help guide you. It can point you toward appropriately priced homes and give you a leg up over the competition (which is important if you’re in a hot market).
Learn More: How to Know If You Should Buy a House
How to get prequalified and pre-approved
Here’s a look at how the process generally works for a homebuyer:
- Save up your down payment. Your down payment will directly impact what loans you can choose from and how much your monthly payment will be. Saving up to 20% of your home’s sale price is ideal, as it helps you avoid mortgage insurance — which adds an extra monthly cost.
- Pull together the information needed. Have your recent W-2s, tax returns, pay stubs, bank account statements, and bills, as well as your driver’s license on hand. You’ll need these for your pre-approval application.
- Consider several lenders. Mortgage rates can vary greatly, so get prequalified loan quotes from at least three to five different lenders. This will ensure you get the best mortgage rate.
- Stay on top of your debts and spending. Keep your finances as-is until your home purchase goes through. Your prequalified offers won’t stand if your finances or credit score change.
- Fill out the full application from your chosen lender. You’ll need the information from Step 2 before applying for a home loan. Once you’re done, the lender will give you a pre-approval letter stating how much you’ll likely get approved for.
After that, you’ll find a house, submit an offer, and move forward with the purchase. Your lender might need additional documentation along the way, so stay in touch with your loan officer and respond quickly to prevent delays.
