Mortgage prequalification and preapproval. The terms are often used interchangeably, but there are actually distinct differences between the two – and if you’re searching for the best mortgage lenders, it’s worth knowing what they are so you know exactly what you’re dealing with, and how they can work in your favor when you’re buying a home.
What is mortgage prequalification?
Mortgage prequalification is the process of determining how much you might be able to borrow from a lender. It’s usually the first step in your homebuying journey and is based on a fairly informal appraisal of your financial status and credit commitments; some lenders will run a soft credit check, while others will simply ask for details of your financial obligations and any personal loans you may have, either over the phone, online or in person.
Once you’re prequalified, you’ll have an idea of the kind of mortgage you could be eligible for, and it could even point you in the direction of potential loans. Lenders will normally use this stage to discuss your requirements and will advise on the mortgage most suited to your needs, explaining the options accordingly. However, at this stage you’re only getting a ballpark estimate of the mortgage you may qualify for; nothing’s set in stone, and the lender will need to take a closer look at your finances (during the preapproval stage) in order to confirm eligibility.
Nonetheless, getting prequalified for a mortgage is standard practice in the current market. It essentially offers proof that you’re likely to be able to buy the home you’re interested in, and most sellers will require evidence that you’re prequalified (normally you’ll be expected to give them a copy of the prequalification letter) before taking that interest further.
How long does it take to be prequalified?
It depends on the lender, but it can be a very quick process, particularly if you go online – in some cases, you can become prequalified in as little as an hour. You’ll likely need to wait a few days to receive the prequalification letter, however, and bear in mind that your prequalified status will usually expire after 90 days; if it’s lapsed, you’ll need to go through the process again.
Does mortgage prequalification affect your credit score?
Provided the lender only undertakes a soft inquiry on your credit report, it shouldn’t affect your score. Some lenders won’t look at your report at all and will simply use the information you provide when determining your prequalification status, so this should have zero impact on your credit rating.
What is mortgage preapproval?
Mortgage preapproval is the next step of the homebuying process, and is much more rigorous. This is the stage during which your lender will conduct a more detailed examination of your finances to determine the mortgage you can afford, and as such will run a more thorough credit check and ask for verification documents (such as bank statements, tax returns, etc.) so they can properly assess your financial situation.
You’ll need to fill in an official mortgage application and, once the lender has analysed your finances, checked your credit score and performed the necessary calculations, you’ll be preapproved for a loan up to a specific amount. This gives confirmation of the mortgage you’ll likely qualify for and you can use this to your advantage – by getting preapproved, sellers will know you can follow through on an offer which could put you ahead of those who aren’t at the preapproval stage, and it can often speed up the buying process, too.
Getting preapproved can also give you certainty over the ceiling price of properties you can look for, as well as giving a better idea of the interest rates and fees your lender could charge – some lenders will even let you “lock in” a certain interest rate, though this will likely be at a cost – which could be useful for your own affordability calculations. Bear in mind, though, that preapproval still doesn’t guarantee that you’ll be given a mortgage, particularly if your circumstances change between preapproval and actually taking out the loan, but it can definitely give you leverage and is the closest you can get to a loan commitment.
Does mortgage preapproval affect your credit score?
Yes. Mortgage preapproval requires a hard credit check, which will always show up on your credit report and could result in a temporary dip to your score. However, the key word here is “temporary” – any negative impact is likely to be minimal and, provided you keep up with effective credit management habits, can quickly be reversed.
How long is a mortgage preapproval good for?
A mortgage preapproval can initially take longer to come back from the lender, simply because of the extra checks involved, but once you’ve received the preapproval letter it will typically be valid for 60-90 days. For this reason you’ll want to time things carefully to ensure you’re in the right position to buy the home you want.
So… what’s the difference?
The main difference between the two is in terms of the weight of their credit checks and resulting proof of your creditworthiness. Preapproval gives a more specific idea of the amount you’ll be able to borrow and, as such, carries more substance when it comes to negotiating with a seller; that said, prequalification could still be beneficial if you’re in the early stages of scouting out your ideal home.
Ultimately, prequalification and preapproval should be seen as vital first steps on your mortgage journey, helping ensure you’ll be able to get the home you want.
However, both are arguably more important when buying a new home than when you’re refinancing or seeking a reverse mortgage; if you already own the home you won’t need to compete against other buyers to show your worth, though you’ll still need to go through the approval and credit checking process to ensure you’ll be eligible for a new loan. It may also be worth seeking the best credit repair services if you’re in any way concerned about your credit profile.