As you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval.” It’s essential to understand what these terms mean – they’ll guide your home search and help you focus on homes you can afford. When the time comes, they can also help you decide how much to offer and show the seller that you’re a serious buyer.
At the most basic level, prequalification and preapproval are types of mortgage approvals, and they refer to the steps a lender takes to verify that a client can afford a mortgage. In this article, we’ll review some common ways lenders use prequalification and preapproval. But first, a couple points to remember:
- Every lender handles mortgage approvals differently. The steps and words involved change from lender to lender. Many lenders use prequalification and preapproval interchangeably.
- No matter what type of mortgage approval you get, it’s not a guarantee that you’ll close the loan. Prequalification or preapproval is a way for a lender to help you and a seller estimate what you can afford. After you find a house and make an offer, the home will still need to be appraised by a third party and inspected for potential repairs before you can close the loan and buy the home.
A prequalification generally means that a lender collects some basic financial information from you to estimate how much house you can afford.
It’s common for a prequalification to rely on self-reported information, instead of verifying by pulling your credit report or reviewing financial documents. This means a prequalification is typically a ballpark estimate. It also means it’s less reliable than a preapproval, which usually involves your lender checking your credit score and reviewing bank statements and other documents.