Mortgage Pre-Approval vs. Prequalification: Which Should You Get?

October 16, 2020 Loans & Finance

If you’ve been researching a potential home purchase, then you’ve probably seen the terms pre-approval and prequalification thrown around. Though they might sound alike, they’re typically two different and important steps in the homebuying process.

Here’s how a prequalification differs from a pre-approval:

  • Mortgage prequalification
  • Mortgage pre-approval
  • How long a prequalification and a pre-approval take
  • Requirements for a prequalification and pre-approval
  • How to get prequalified and pre-approved

Mortgage prequalification

A mortgage prequalification is basically a rough estimate of how much mortgage you can qualify for, based on the information you provided the lender. It’s a good first step toward buying a home, as it gives you a general idea of what you might be able to afford.

If you’re not happy with the ballpark number you get prequalified for (or you’re turned down), you might want to step back, work on your credit score, or save up more cash before moving forward.

Mortgage pre-approval

A mortgage pre-approval comes with a full application and more verification. Instead of just taking your word for it, the lender will actually verify your credit score and other personal information. If it checks out, they’ll tell you how big a loan you can expect to be approved for.

They’ll also give you a letter confirming this amount, which you can then submit with any offers you make. Since pre-approval letters mean you’re one step closer to an approved loan, they can often help you stand out from other buyers, especially in a bidding war.

Credible makes it easy to get a pre-approval letter. Our process is entirely online and can be completed in just three minutes. Check out the table below to see how our process differs from that of traditional lenders.

Traditional lenders Credible
How long does it take? 1 to 3 days 3 minutes
Credit check Hard credit pull
(negative impact on your credit)
Soft credit pull
(no impact on your credit)
Online process Typically minimal; instead processed via in-person visit at a branch or phone call with a licensed loan officer 100% online
Compare multiple lenders? No, visit multiple lenders to receive multiple pre-approval letters Yes, pre-approved across multiple lenders at once
Multiple pre-approval letters to make additional property offers? No, must submit another request to lender for new pre-approval letter Yes, generate additional letters instantly with a customized loan amount

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How long a prequalification and a pre-approval take

Since a prequalification requires only a few pieces of information, it’s the fastest option. If you opt for a lender with an online prequalification form, it typically takes just a minute or two to complete.

Pre-approvals, on the other hand, take a bit longer since the lender needs a more comprehensive look at your finances. You might also need to provide documentation of your income, assets, and other financial data.

Good to know: The exact amount of time it takes to submit and process your information depends on the lender. Traditional mortgage lenders say receiving a pre-approval letter can take up to 10 days. Some online lenders, however, can deliver them in minutes.

Requirements for a prequalification and pre-approval

  Prequalification Pre-approval
Requirements
  • Rough estimate of your credit score or a soft credit pull
  • Rough estimate of your income and assets
  • Estimated down payment and mortgage amount
  • Full application
  • Hard credit check
  • Documented proof of income, debt, and assets
  • Estimated down payment and mortgage amount
Benefits
  • Gives you a rough idea of what you may be able to afford
  • Can tell you if your finances are in a good place to buy a house
  • Gives you a more accurate idea of what you can afford
  • Can give sellers more confidence in your offers
  • Can help you stand out in a bidding war
Process Fill out a short online form or have a short phone call/meeting with a loan officer Fill out a longer application, agree to a credit check, and provide required documentation to lender.
Documentation None
  • Recent pay stubs
  • Last two W-2s and tax returns
  • Last two months of bank and asset statements
When to do it When you’re curious if buying a house is possible given your finances or you just want a rough idea of what you may be able to afford. When you’re ready to actively start searching for a house and you know your finances are ready.

Check mortgage rates:

  • 30-year fixed mortgage rates
  • 15-year fixed mortgage rates

Generally, prequalification is best before you begin the home shopping process. You’ll use a

lender’s prequalification form to gauge whether it’s a good time (financially) for you to buy a home and how much you might be able to afford.

A pre-approval is best reserved for serious homebuyers. If you’ve done your research, prepped your finances, and you’re ready to start shopping for homes, you’ll want a pre-approval in hand to help guide you. It can point you toward appropriately priced homes and give you a leg up over the competition (which is important if you’re in a hot market).

Learn More: How to Know If You Should Buy a House

How to get prequalified and pre-approved

Here’s a look at how the process generally works for a homebuyer:

  1. Save up your down payment. Your down payment will directly impact what loans you can choose from and how much your monthly payment will be. Saving up 20% of your home’s sale price is ideal, as it helps you avoid mortgage insurance — which adds an extra monthly cost.
  2. Pull together the information needed. Have your recent W-2s, tax returns, pay stubs, bank account statements, and bills, as well as your driver’s license on hand. You’ll need these for your pre-approval application.
  3. Consider several lenders. Mortgage rates can vary greatly, so get prequalified loan quotes from at least three to five different lenders. This will ensure you get the best mortgage rate.
  4. Stay on top of your debts and spending. Keep your finances as-is until your home purchase goes through. Your prequalified offers won’t stand if your finances or credit score change.
  5. Fill out the full application from your chosen lender. You’ll need the information from Step 2 before applying for a home loan. Once you’re done, the lender will give you a pre-approval letter stating how much you’ll likely get approved for.

After that, you’ll find a house, submit an offer, and move forward with the purchase. Your lender might need additional documentation along the way, so stay in touch with your loan officer and respond quickly to prevent delays.

Credible simplifies the pre-approval process. We’ll securely gather your information and you can see if you qualify for an instant streamlined pre-approval letter in just three minutes. We allow you to adjust your down payment and figure out how much home you can afford by simply adjusting a slider.

Credible-mortgage-preapproval-tool

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