As you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval.” It’s essential to understand what these terms mean – they’ll guide your home search and help you focus on homes you can afford. When the time comes, they can also help you decide how much to offer and show the seller that you’re a serious buyer.
At the most basic level, prequalification and preapproval are types of mortgage approvals, and they refer to the steps a lender takes to verify that a client can afford a mortgage. In this article, we’ll review some common ways lenders use prequalification and preapproval.
Every lender handles mortgage approvals differently. The steps and words involved change from lender to lender. Many lenders use prequalification and preapproval interchangeably although they’ve meant fundamentally different things traditionally.
No matter what type of mortgage approval you get, it's not a guarantee that you’ll close the loan. Prequalification or preapproval is a way for a lender to help you and a seller estimate what you can afford. After you find a house and make an offer, the home will still need to be appraised by a third party and inspected for potential repairs before you can close the loan and buy the home.
What’s A Mortgage Prequalification?
A prequalification generally means that a mortgage lender collects some basic financial information from you to estimate how much house you can afford. Getting confirmation from a lender that you prequalify for a home loan allows you to have a general idea of how much you’ll be approved for when it comes time for closing.
It’s common for a prequalification to rely on self-reported information, instead of verifying by pulling your credit report or reviewing financial documents. This means being prequalified for a mortgage typically leaves you with a ballpark estimate. It also means it’s less reliable than a preapproval, which usually involves your lender checking your credit score and reviewing bank statements and other documents.
As you begin searching for a home, real estate agents and sellers want to see you’ve been working with a mortgage lender so they know you can afford to buy a home. After you’ve been prequalified, you’ll usually receive a “prequalification letter” you can show to an agent or seller as proof you’re working with a lender. This is a good first step, but it typically won’t carry as much weight as a preapproval because a lender hasn’t yet verified your information. Going beyond a prequalification and getting preapproved by a loan officer is a critical step to showing you’re serious about buying a home.
Both prequalification and preapproval provide borrowers with an estimation of how much home they can afford. However, a mortgage preapproval is a more official step that requires the lender to verify your financial information and credit history. Documents required for a preapproval may include pay stubs, tax returns and even your Social Security card.
This means a preapproval is a stronger sign of what you can afford and adds more credibility to your offer than a prequalification. This will also allow you to show sellers a preapproval letter to demonstrate that your financial information has been verified and you can afford a mortgage. However, check with your lender to be sure.
Why Is Getting Approved For A Mortgage Important?
Getting approval for your mortgage means that a lender has reviewed your financial situation and confirmed your ability to take on mortgage payments.
When you get a mortgage approval, your lender estimates how much you can afford to borrow, what your interest rate could be and how much your mortgage payments could be. You and your real estate agent can use this information to focus on homes you can afford.
A mortgage approval also proves to sellers that you can afford the home they’re selling. Without first securing approval from a lender, the seller might not trust your offer is genuine. Your offer might not be accepted – and even if it is, offering to buy a home without lender approval can slow down your mortgage loan application.
Getting Approved With Rocket Mortgage: What To Expect
Rocket Mortgage offers a few levels of approval designed to give you a clearer picture of what you can afford:
With a Prequalified Approval, we’ll pull your credit and ask you some questions about your income and assets. Then, we’ll estimate what you can afford. By checking your credit score, our Prequalified Approval can be more accurate than a standard pre-qualification that doesn’t involve this step. If you’re eligible for a mortgage, we’ll issue you a Prequalified Approval Letter.
After you’ve been Prequalified Approved, you can level up to a Verified Approval. 1 You’ll speak to a Home Loan Expert and provide some documentation so we can verify your income and assets.
Because we’re verifying your income and assets along with your credit history, a Verified Approval is a more accurate estimate of what you can afford. It also carries more weight with a real estate agent and the seller, because they’ll know we verified that you can afford the home you wish to buy.
Once you get Verified Approval, we’ll give you a Verified Approval Letter. You can show this to your real estate agent and the sellers as proof that you can obtain a large enough mortgage to purchase the home.
Remember, both Prequalified Approval and Verified Approval℠ are estimates to help guide your home search. After you make an offer on a house, your full mortgage approval will depend on the home being appraised by a third party and passing any required inspections.