Comparing Mortgage Loan Prequalification and Preapproval

Mortgage loan prequalification and loan preapproval both sound great, and both can be good. But one is far closer to a guarantee from a lender. If you are applying for a mortgage loan, it’s important to understand the differences between the two.

Prequalified Is Not Approved

Being prequalified for a loan means a lender has made a best estimate of your borrowing power. When you have mortgage loan prequalification, a lender knows what you earn and what your expenses are. From there, an estimate is made of the amount of loan you could qualify for subject to many other factors.

In essence, it means it’s not a waste of your or the lender’s time for you to find a home in the estimated price range and come in to apply for a loan. You are likely to get approved providing that nothing has changed for the worse in your financial circumstances.

Getting Prequalified

Mortgage loan prequalification can be done in person or over the phone. The lender will need to know your income and all your expenses, in particular your debt. The amount of money you can borrow typically is based on a debt-to-income ratio. Most lenders would like to see a 36 percent debt-to-income ratio with a mortgage being 28 percent.

The lender might do a credit check on you, but it’s also common for there to be no credit check made. You should tell the lender if there is anything problematic in your credit history. 

While mortgage loan prequalification falls far short of being approved for a loan, it is a good step to take at the beginning of the home-buying process. Being prequalified can help you narrow your home search to affordable options for you.

Preapproval Is Approved But Not Guaranteed

Unlike prequalification, which is an estimate of what you can likely borrow, preapproval is a commitment in writing from a lender to you. The lender will do a complete analysis of your income, expenses and debt. This will include a credit check.

This means you will get a mortgage commitment letter if the following are met:

  • A home is found within the preapproved loan amount.
  • Nothing changes in your financial circumstances that would affect your ability to pay the approved loan.
  • Nothing arises that could derail any mortgage such as a failed home inspection.

Getting Preapproved

Preapproval can, but does not have to, follow prequalification. It is an in-person meeting with your mortgage loan officer. You will need to provide:

  • Your previous two years income tax returns
  • Your bank statements for the past year
  • Any W-2 forms you have received
  • Any additional information, such as private loans, that could affect your credit standing.

The lender will do a credit check. You must fill out a mortgage application, and you can expect to pay a filing fee.