Pre-Qualification and Preapproval: What’s the Difference?

Mortgage Process, Mortgages
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Mixing up pre-qualification and preapproval is easy to do. But it’s important to know the difference because only one — preapproval — will put you ahead of the homebuying competition.

What is pre-qualification?

Getting pre-qualified for a loan is like asking for approval from your significant other’s parents before you propose. While it might be nice to get a “yes” from the parents, until you drop to one knee for the ultimate approval, you aren’t getting anywhere.

Rob Veneziano, a senior loan advisor with Fairway Independent Mortgage Corp. in Boston, describes pre-qualification as “preapproval light.” He says the process involves getting an overall picture of a borrower and his or her debts, income and assets. Borrowers can get pre-qualified over the phone, online or in person.

Talking with a lender before you make a loan commitment can give you a sense of where you are financially, especially if you’re just testing the homebuying waters and aren’t ready to jump in. But a pre-qualification won’t get you far if you’re serious about securing the right loan and, eventually, the right home.

What is preapproval?

Preapproval requires you to provide proof of your financial history and stability. The lender will verify this documentation and, based on your financial stability, will say whether you’re eligible for a loan and how much you’re eligible for.

The biggest difference between preapproval and pre-qualification, at least from a lender’s point of view, is validating information with documents as opposed to just getting verbal information. From a borrower’s point of view, the difference is the leverage that preapproval gives you when it comes to purchasing a home.

“It’s always a good idea to know how much house you can really afford before you go out there and start falling in love with things,” says Angela Cohen, a branch sales manager with Network Home Loans in Lynnwood, Washington. “It’s good to know the price range you fit into so you’re not overpricing yourself. You don’t want to go into homeownership being what I call ‘mortgage poor,’ where you’re stressing out every month trying to make your mortgage payment.”

Cohen and Veneziano agree that it’s especially smart to get preapproved in a competitive market. Most seller’s agents won’t accept an offer without a preapproval letter. “They want it to say ‘preapproval’ at the top because they know the lender’s done an in-depth analysis,” Veneziano says.

Along with having your credit scores pulled by the lender, you’ll provide information in the form of W-2s, a current pay stub, a summary of your assets and your total monthly expenses, and, if you already own real estate, a copy of both your mortgage statement and your homeowners insurance policy.

Keep in mind, though, that getting preapproved doesn’t guarantee you a loan. You’ll still have to go through the underwriting process after you submit the application and wait for final approval.

Why does pre-qualification even exist?

Cohen says that years ago, pre-qualification used to be all that lenders needed to determine whether a borrower was able to take on a loan. That has evolved into a more logical approach, she says: “After a buyer says they make this much money, the lender will verify and confirm.”

So should you skip pre-qualification all together and go right to preapproval? Cohen says absolutely. That way you’ll know for sure what you can or can’t buy, and if you’re serious about buying, you won’t waste any time.

How long does preapproval take?

The length of time it takes to get preapproved depends on the lender. The process is typically done within 24 to 48 hours after the lender receives all your documents, Cohen says.

What does preapproval cost?

Most lenders don’t charge a preapproval fee. If anything, there might be a credit report fee, which is typically around $25.

Getting your credit pulled won’t affect your score, as long as you complete your loan shopping within 30 days of your first credit pull. And there’s no limit to how many pulls you can get, as long as they’re within that 30-day window.

What’s the next step?

After getting preapproved, you’ll want to stay on solid financial ground. Otherwise, when your application is being processed, any changes could affect the amount you’re approved for.

Here’s what you should — and shouldn’t — do after getting preapproved:

  • Do continue paying your bills on time.
  • Do continue saving.
  • Don’t make any big purchases like a car or furniture.
  • Don’t incur any new debt.
  • Don’t incur any new credit inquiries.
  • Don’t change your job.

Kathleen Beck, a loan officer with West Coast Mortgage Group in Sacramento, California, also recommends that you avoid co-signing on someone else’s loans, since co-signing can affect your credit score.

Veneziano offers up another “don’t,” one that you should keep in mind even before going in for a preapproval: Don’t be afraid of the mortgage process — it will go more smoothly than most people realize, especially if you start with a preapproval.

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Michael Burge is a staff writer at NerdWallet, a personal finance website. Email: mburge@nerdwallet.com