Mortgage Prequalification vs. Preapproval

What is Mortgage Prequalification?

Prequalification is the first step of your homebuying journey. During the prequalification stage, a lender collects only basic financial information to give you an estimate of how much you can afford. This includes an assessment of your finances, credit, and current debt, but it’s not an in-depth evaluation.

However, prequalification does not guarantee approval for a mortgage, nor does it qualify you as a serious buyer to agents. The process provides a rough estimate of how much you can borrow and helps narrow down your budget for a home.

Will Mortgage Prequalification Hurt my Credit?

A prequalification will not affect your credit as long as the lender uses an estimated credit score or a soft inquiry.

During the prequalification process, lenders are not required to officially verify credit or financial information. Because prequalification relies on self-reported details, lenders don’t always verify your credit. Some may run a soft credit check, but this does not appear on your credit report or lower your score.

That’s why prequalification should only be viewed as a rough estimate. Once you apply for a mortgage or seek preapproval, your actual loan amount may differ.

What is Preapproval for a Mortgage?

Preapproval, on the other hand, is a more official step toward applying for a mortgage. This involves a detailed assessment of your current and past financial situation.

At this stage, a lender will verify employment and credit history to confirm your ability to repay a mortgage. Lenders will ask you to provide pay stubs, tax returns, or social security information.

This process takes longer and is much more detailed than a prequalification. However, it provides all the necessary documentation to show sellers and agents that you’re serious about purchasing a home.

In a competitive market, preapproval makes your offer stronger since sellers are more likely to choose buyers with preapproval over those without it.

What are the Minimum Requirements for Loan Preapproval?

To get preapproval for a loan, you will submit the required documentation so that the lender can fully assess your finances. The exact requirements can vary depending on the loan type and the lender’s guidelines.

Generally, lenders want to confirm the following information before granting loan preapproval:

• Personal identification, such as a passport or driver’s license

• A minimum credit score based on the type of loan and lender guidelines

• Financial information that shows your debt-to-income ratio

• Two years of employment history (not necessarily at the same place of work)

• Social Security information

• Pay stubs

• Bank statements

• Tax documents

• Business tax returns (if self-employed)

• Investment account statements (if applicable)

• Rental information and landlord references

• Down payment proof (including gift letters if your down payment was a gift)

Unlike prequalification, mortgage preapproval requires a hard credit inquiry. Preapproval does affect your credit score, although only slightly and temporarily. Each lender will have slightly different criteria. Some programs allow scores as low as 580, although many others set higher standards. At First Residential, borrowers typically need a minimum credit score of 620 for preapproval. Most lenders also look for a debt-to-income ratio of 43% or lower, though some may be more flexible depending on your overall finances.

It’s wise to check your lender’s individual loan requirements before applying. However, all lenders will verify basic information, such as your ID, credit report, income, down payment, and monthly debts. It's important to gather these documents ahead of time, so you can submit them quickly.

Should I Get Preapproved or Prequalified?

Which one is right for you? This depends on when you’re ready to start shopping for your new home.

On one hand, prequalification is an affordability estimate that’s quicker to apply for and doesn’t require a hard credit check or a great deal of documentation. This usually best suits the very early stages in your homebuying journey. It can help you determine how much home you can realistically afford.

Preapproval, on the other hand, is a more serious assessment of your buying power. You must submit the required documentation for lenders to thoroughly check your financial history, credit score, debt-to-income ratio, employment history, and the source of your down payment.

While this is a lengthier process, it also positions you better to put offers on homes. Sellers and agents see preapproval as proof that you can secure financing for a home.