Mortgage Prequalification Letter vs. Preapproval: What’s the Difference?

If you’re considering homeownership, a mortgage prequalification letter gives you a lender’s best guess about how much you can borrow based on a quick review of your finances. However, if you’re serious about making an offer, a mortgage preapproval tells a home seller that a lender has vetted your finances and you’re ready to buy.

Understanding the difference between prequalifying for a mortgage and getting a preapproval will help you decide which process to choose.

Key takeaways

1. Mortgage prequalification is an informal assessment of your finances, while a mortgage preapproval requires more formal documentation and vetting.

2. You don’t need to be prequalified to start house hunting, but real estate agents often require a preapproval letter before you can submit an offer to buy a home.

3. Neither prequalification nor preapproval guarantees you’ll be approved for a mortgage loan.

Mortgage prequalification vs. preapproval: At a glance

Here’s an overview of the differences between the two:

What is a mortgage prequalification letter?

A mortgage prequalification letter is a lender’s estimate of the loan amount you may qualify for based on the information you provide about your monthly income and debts, your down payment funds and potentially a soft inquiry of your credit report and score.

You’ll typically provide the information through an online loan application, a smartphone app, over the phone or in person.

What is a mortgage preapproval?

Mortgage preapproval is a lender’s assessment of the loan amount you qualify for based on a thorough review of your financial situation. Instead of taking your word, lenders usually request and review documents like pay stubs, W-2s and bank statements. They’ll also pull a credit report to back up what you’ve included on your loan application.

A mortgage preapproval usually carries more weight than a prequalification letter if you’re buying a home. In this case, since the information you’ve provided to the lender has been vetted, it gives sellers (and their real estate agents) solid evidence confirming that you can repay the mortgage.

Mortgage prequalification vs. preapproval: What’s the difference?

At first glance, it might look like mortgage preapproval and prequalification letters say the same thing. In most cases, both letters show how much money you could be approved to borrow in a home loan.

However, a mortgage preapproval will also provide you with more in-depth information, including:

• The loan program. This could be a fixed-rate or adjustable-rate mortgage, and whether it’s a program backed by a government agency (like FHA or VA) or a conventional loan.
• The loan-to-value ratio. Called your LTV ratio for short, this figure represents how much of your home’s value you’re borrowing. The less you put down, the higher your LTV ratio will be.
• The loan term. This is the repayment period expressed in months or years. The most common terms are 30 years (360 months) or 15 years (180 months).
• The interest rate you qualify for. The lender offers you a mortgage rate based primarily on your credit score, although several factors determine the rate you’re quoted.

To get the most accurate mortgage prequalification or preapproval, you’ll need to gather some information before you contact a lender. Here’s a look at what you need for each:

How to get prequalified for a home loan

If you want to get prequalified for a mortgage, you’ll need to share the following information:

• Income: You’ll need to provide your salary or hourly rate information, or an estimated average income over the past two years if you’re self-employed or earning variable income (like commissions or bonuses).
• Credit: Depending on the lender, you may need to provide your best guess at your credit score or agree to a soft credit inquiry.
• Down payment: You’ll need an estimate of how much you’ve saved for a down payment.
• Debt: You’ll also be expected to provide an estimate of your monthly debt payments.

How to get preapproved for a home loan

On the other hand, if you want to get preapproved for a mortgage, you’ll need to provide the lender with the following financial documents:

• Income: Most borrowers will need to provide copies of 30 days’ worth of pay stubs and the last two years’ W-2s. However, if you’re self-employed or have variable income, be prepared with two years of your tax returns.
• Credit: You’ll need to give the lender authorization to pull your credit report and scores.
• Assets: Most lenders require a few months of statements for any bank or investment accounts in your name.
• Debts: You’ll also need to provide statements for any debts you owe.

Should you get prequalified or preapproved?

Deciding whether to get prequalified or preapproved depends on how committed you are to buying a home and how solid your finances are right now.