Mortgage Prequalification vs. Preapproval
Not all mortgage approvals are equal. Here's what prequalification, preapproval, and preauthorization actually mean before you start house hunting.
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My wife and I are placing our home on the market soon, so we will need to start looking for a new home. House hunting is only half the battle, though. Once we decide upon the house we want, we need to get a mortgage.
One of the first steps we will need to do when we search for a mortgage is to find out if we are qualified to get a loan and, if so, how much of a loan we would be approved for. This will help us know how much house they can afford before we even start shopping and help prevent us from buying more house than we need.
Once I started looking at mortgages, I realized the terms used in the initial steps of getting a loan are often used incorrectly and can be misleading. ‘Preapproval’, ‘prequalified’, and ‘preauthorized’ are not all the same, and in order to know what you are getting into, you need to understand the differences.
Prequalification vs. Preapproval vs. Preauthorization
The following is an explanation of the terms often used for mortgage qualifications.
Mortgage Preapproval
When you are preapproved for a mortgage, you receive a conditional offer from the mortgage company indicating you are eligible for a loan up to a certain amount. This is not a guarantee as final approval still depends on underwriting and verification when you’re ready to close.
This is the step that comes before a full mortgage loan approval. It is not as involved of a process as the full approval, but it does require credit checks and income/employment verifications.
The lender will also verify your financial obligations like other loan notes and credit card balances. You will need to provide financial documents, including W-2s and bank account statements.
When you receive a preapproval status, you can shop for a home knowing you are approved to move forward to a loan commitment. A lender will still need to fully qualify you for a loan by rechecking credit and verifying information when you are ready to make an offer on a home.
Keep in mind that preapproval triggers a hard credit inquiry, which may temporarily lower your credit score by a few points, so it is best to wait until you are ready to seriously shop before applying. Preapproval letters are typically valid for 60 to 90 days, depending on the lender. If your home search extends beyond that window, you may need to reapply.
Mortgage Prequalification
A mortgage prequalification is not as in-depth of a process as a preapproval. A prequalification on a mortgage is basically an estimate of the amount of mortgage you can afford to pay. The amount is calculated based on the information the borrower provides. A prequalification by a lender does not mean a mortgage is guaranteed. Home buyers would need to provide more information to the lender for full mortgage approval.
Mortgage Preauthorization
Note: ‘Preauthorization’ is not a universally standard term in U.S. mortgage lending and you are less likely to encounter it than prequalification or preapproval. Some lenders, particularly in Canada, use it more commonly. If a lender uses this term, ask them exactly what their process involves.
Lenders can provide a mortgage preauthorization that determines the maximum amount of financing an applicant is eligible to receive based on individual financial situations, including liabilities, assets, and income amounts.
With a preauthorized mortgage, you will be guaranteed an interest rate for at least 90 days. You will have an understanding of what price range you should look for when shopping for your home. When you are ready to commit to a loan, your preauthorization will make the process faster than starting from scratch and make it easier to lock in good mortgage rates.
Research Before Applying for a Mortgage
Potential homebuyers who do not seek out financing options before shopping for a home may find it more difficult to secure the loan they want based on the homes they found.
In today’s competitive housing market, speaking with a lender before shopping is almost essential, not just to avoid complications, but because sellers increasingly expect buyers to arrive with preapproval in hand. Knowing the amount of loan you will be eligible for and how much mortgage payment you can afford each month will help you streamline your home selection process.
Once you have found the home you are interested in, you will already have a relationship with a lender and be a step closer to getting full approval on your loan. Then you just need to decide on a few key details, such as a 15-year or 30-year mortgage, fixed-rate mortgage or variable mortgage, traditional or VA loan, or other factors that could affect your mortgage.
Additionally, being able to prove your loan eligibility to a seller will be a powerful tool in your negotiation process. In some cases, as lending regulations have become stricter, a mortgage preapproval letter is required to look at some real estate pieces.
