Mortgage Preapproval and Mortgage Prequalification: Is There a Difference?

Many terms used by lenders and agents can get confusing. Some people may think that the terms mortgage preapproval and mortgage prequalification are simply different ways of saying the same thing. While this is not true, both terms may be considered milestones on the process to getting approved for a mortgage loan.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

What Is Mortgage Prequalification?

A lender needs to consider different factors when an applicant wants to be approved for a mortgage loan. After a series of questions, a lender then may inform an applicant they are prequalified. However, much still needs to be done by the applicant to get approved for their mortgage.

The prequalification process involves self-reporting on the behalf of an applicant. A lender asks a potential borrower basic financial questions that would cover areas such as the borrower's current:

• Debt level
• Income
• Credit score
• Other assets

The potential borrower answers these questions, and the lender decides whether the borrower meets the basic financial criteria. At this point in the process, none of the information is verified. Mortgage prequalification is an informal process, with a lender responding in 1 to 2 days. This is a nonbinding evaluation providing some information on the possibility of getting approved, and a potential qualification amount. Mortgage prequalification does not guarantee approval for a home loan.

What Is Mortgage Preapproval?

Preapproval is a bit more complicated than prequalification, and borrowers should know the difference. This process involves actual documentation and is more time-intensive than with prequalification. It may take a person some time to get the documentation requested for this process together. Those who are preapproved have much of what they need when it comes time to apply for the loan. Individuals seeking mortgage preapproval should gather and provide a lender with:

• Bank statements covering the previous two months
• Recent pay stubs
• Two years of tax returns

A lender will perform a careful review of everything provided to them. If preapproved, an applicant will receive a conditional commitment letter. Conditions in the letter will need to be met by the applicant. As with prequalification, there is no guarantee of mortgage approval, but an applicant is much closer to getting approved if they can check off all the conditional commitment letter conditions.

The Path to Mortgage Approval

While prequalification is a great start, it does not provide the lender with the verification and depth of detail needed to make any guarantees to an applicant.

Mortgage preapproval does require more effort, and the response time may be longer. If sufficient documentation is not provided to a lender, it may make it more difficult to get a positive response. A benefit of this process is that individuals come away with a better understanding of what they may need to work on to get approved for a loan. Other advantages include insights into credit history, debt, and income levels. Having time to work on areas can improve the applicant's likelihood of securing a home loan.

Not everyone will be able to meet the requirements of a conventional loan. The good news is that there are other options. There are many types of mortgage loan products, and larger lending institutions may be able to take on more risk than smaller lenders. Some loans, such as VA loans, are backed by the government, and have easier lending requirements. Applicants should speak with a reputable lender to understand more about mortgage loan products and how to get approved.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.