When seeking a mortgage, you'll across terms such as “prequalified” or “preapproved.” Understanding these mortgage terms can help you in the home purchase process. The terms "prequalified" and "preapproved" refer to the initial assessment the lender conducts to determine if you're eligible for a mortgage. Borrowers can use these assessments to guide their home search.
What’s the difference between being prequalified and preapproved for a mortgage?
Whereas some lenders may use "prequalified" and "preapproved" interchangeably, the terms have different meanings. If you're prequalified for a mortgage, it means the lender has performed a quick review of your loan eligibility. The lender will issue a prequalification letter that indicates the lender thinks you could qualify for a mortgage if you apply for it.
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On the other hand, getting preapproved for a mortgage means the lender has conducted a thorough review of your loan eligibility. In this process, the lender will request documents detailing your income and assets to verify if you can afford a loan. It also involves checking your credit score. If satisfied, the lender will issue a preapproval letter that shows the maximum loan it is willing to offer you and the interest rate. As with mortgage interest rate locking, mortgage preapproval contracts are typically valid within a specific timeframe.
Whereas you could be prequalified for a home loan in a matter of minutes, getting preapproved for a mortgage may take days or weeks. Preapproval takes longer because the lender needs to review your official documents before making its decision.
How do you prequalify for a mortgage?
Getting prequalified for a mortgage should be your first step as a smart prospective homebuyer. It will let you know in advance how much you may need to borrow based on your budget, and helps you narrow your home search to properties you can afford. How do you prequalify for a mortgage, you might ask?
Mortgage prequalification often relies on self-reported information. The lender may request documentation showing your income, expenses, and basic information about your bank accounts. You may also need to state the downpayment and mortgage amounts you want. Needless to say, it helps to give accurate information if you want to get a more precise estimate of your mortgage eligibility.
When should you get prequalified or preapproved for a mortgage?
Finally, choosing a prequalified or preapproved mortgage ultimately depends on how serious you are about a home purchase, and the stage you're in the home purchase journey.
For example, if you're just thinking about buying a home but not ready to make an offer, getting prequalified for a mortgage can be helpful. However, if you've identified a home and are ready to make an offer, getting preapproved for a mortgage would be best. Mortgage preapproval shows sellers that you're a serious prospective buyer, and can help you stand out in a competitive home market. Keep in mind that a mortgage preapproval letter is typically good for three months, so it’s wise to go for it when you’re about ready to make your move in the home market.