Prequalified vs preapproved: Understanding mortgage terminology

If you’re a first-time homebuyer, odds are you’ve encountered the words “prequalified” and “preapproved”
interchangeably. However, when it comes to home loans, there are some critical differences between the two.

Mortgage prequalification

Getting prequalified helps borrowers find out what kind and what size mortgage they’re likely to be approved for.
Prequalification will give you an estimate based on self-reported information like income and credit history. You
can use this “big picture” info to plan for the future, or to compare lenders.

Mortgage preapproval

If you’re serious about buying a home in the near future, getting preapproved will simplify your buying process. It
will also make sellers more likely to take you seriously, since you already have your financing partially
secured.

For preapprovals, the lender will request details of your financial situation including income statements, credit
reports and information about any other assets. You’ll need to submit official documents for their review, and in
turn receive a letter of preapproval for a certain amount of financing.

Mortgage applications & credit scores

There are two types of credit checks lenders perform to view your credit history: hard inquiries and soft inquiries.

A soft inquiry won’t affect your credit score. However, a hard inquiry can lower your score a bit for a period of
several months. Prequalification usually involves a soft inquiry, while preapproval has a hard inquiry. So, don’t
panic – expect your credit score to drop a few points temporarily after getting a pre-approval letter.

After preapproval

Once you’re preapproved for a mortgage, you can begin searching for homes with a clear budget. If you decide to make
an offer on a home and your offer is accepted, your preapproval will make it easier to move forward in closing on
the home.

Once the lender checks off on the house you’re making an offer on, they will send you a loan commitment letter,
enabling you to move forward with closing on the home.

Getting financing for a home can seem daunting at first. However, the more you understand about the prequalification
and preapproval processes, the quicker and simpler your experience will be.