If you’re looking for a new home, you’re probably as excited as you are overwhelmed—especially when financing the purchase. Unfortunately, two of the most common financing terms that confuse first-time homebuyers are prequalification and preapproval.
While both terms relate to that first step in homeownership, they mean very different things. Below, we’ll explain the key differences between the two terms and explain why you need to understand both.
The Quick Answer: What’s the Difference Between Prequalification and Preapproval?
In short, when lenders give you prequalification status, they review your credit to see if you’re likely to qualify for a loan. Preapproval, on the other hand, is a more intensive review process that gives you a better idea of whether you’ll receive final credit/loan approval.
It’s worth noting that review procedures and timelines may vary depending on the lender and loan you’re applying for.
The Specifics: What Does Prequalified Mean?
When you begin the prequalification process, lenders will investigate your “creditworthiness” to see if you qualify for a home loan. So you may have to share financial information, like your income, savings, debts, or monthly house payments. Some lenders may even grant you prequalification status based on a “soft” credit check, which won’t impact your credit score.
Once you are prequalified, you can formally apply for a loan, which is a bit more involved. When you formally apply for a loan, you may have to provide official documents like bank statements and tax returns. While earning prequalification status doesn’t necessarily guarantee final approval, it’s a good indicator of your financial standing.
The Specifics: What does Preapproval Mean?
Getting preapproved means that you’ve completed the formal application process for a mortgage lender and provided the documents necessary to verify your financial situation—your income, assets, debts, and credit history. Your lender will review these documents to ensure you are in good financial standing, have a healthy debt-to-income ratio, and can repay your loan.
You’ll need to gather tax returns, W-2s, bank statements, pay stubs, and any other documents the lender requests to increase the odds of receiving preapproval status. Next, search for a lender that fits your needs and requirements. If you don’t know a trusted lender, ask your realtor or friends and family for recommendations. In short, shop around. Not all lenders are created equally—and some offer lower interest rates and more flexible lending requirements than others.
Will Applying for Preapproval or Prequalification Status Impact My Credit?
The short answer is yes. When you apply for either preapproval or prequalification, lenders will perform a credit check (or “hard inquiry”) to review your credit history, impacting your credit score.
The good news is that this impact is minimal and temporary. According to the Consumer Financial Protection Bureau, multiple credit checks for the same type of loan are generally treated as a single inquiry. Thus, multiple checks are unlikely to have a major impact on your credit score.
Working with First-Time Home Buyers? That’s Our Specialty!
As a top Pasadena mortgage broker serving LA County and all of California, we believe in providing first-time home buyers with a superior lending experience tailored to your needs and goals. We will work with you to help you determine the right loan option for you. Request your rates today to get started!