Mortgage preapproval vs. prequalification

Couple looking to purchase a home discussing the difference between a mortgage prequalification and a mortgage preapproval

As you prepare to buy a new home, one of the most important considerations for you, your real estate agent and sellers is how much home you can afford.

If you plan to finance the home with a mortgage, you need to find out from a lender how much money you can borrow. You’ll also want to figure out what payment amount is comfortable for you within your overall monthly budget. To better understand what you may be able to afford, there are two processes you can choose from to have a lender help evaluate your financial situation and provide guidance on mortgage options: mortgage prequalification and mortgage preapproval.

What is mortgage prequalification?

If you decide to go the home loan route and want a quick, general idea of your spending power, getting a mortgage prequalification can be a good first step. Being prequalified means you’ve told your lender basic information about your assets and income, and they’ve come back with an estimate of how much home you can afford.

That estimate is not guaranteed by the lender because they most likely have not seen proof of your finances or pulled your credit at this point. In fact, you haven’t even put in an official mortgage loan application yet. Think of prequalification as a loan amount you might qualify for if you apply.

The benefit of prequalification is speed. You might be able to get prequalified over the phone in minutes.

Prequalification to buy a new home

General estimate
Fast — preapproval from a lender may take only minutes
Financial information is not verified by a lender
Credit is not checked

What is mortgage preapproval?

Being preapproved for credit for a mortgage means you’ve taken the process beyond prequalification. You’ve submitted a loan application via a Mortgage Banker who has pulled your credit score, and you’ve given the lender all your necessary documentation for mortgage preapproval requested by the lender regarding income, assets, and employment.

With a preapproval for credit, an underwriter has reviewed the loan file and issued a written promise to lend, subject to review of an appraisal on the house in question and other conditions depending on when you find your home.

From a real estate agent’s perspective, preapproval gives you a leg up by being prepared to make an offer faster than other buyers who are not already preapproved. When you find a house you want, you already have your financing well in hand.

In fact, many real estate agents may only work with preapproved homebuyers because they know their price range with certainty. It also shows sellers that the customer may be able to complete the purchase on a quicker timeline.

Preapproval to buy a new home

Promise to lend, may be subject to a home appraisal
More in-depth — meaning it will take more time to complete than prequalification
Financial information is verified by a lender
Credit is checked

What to expect

Prequalification is usually much faster than preapproval because the lender doesn’t verify the information you have provided.

For a prequalification, lenders will typically ask for your personal contact information, an estimate of your credit score, a general idea of home price and what type of home you’re looking for (primary vs. secondary residence, condo vs. single-family house, etc.). Lenders may want to pinpoint your debt-to-income ratio (the percentage of your gross monthly income that goes toward paying off your total debt) and your potential loan-to-value ratio (the percentage of the total value of the property you are looking to purchase that represents your home loan amount). Also, be prepared to tell your lender about any down payment you may be planning to make. Your credit will not be checked, so you don’t need to worry about a prequalification affecting your credit score.

For a preapproval, the lender may obtain your credit report and ask you for initial financial documents such as tax returns, pay stubs, W-2s, bank statements, etc. It’s an in-depth investigation of your finances, so expect it to take a couple of days or more. The extra time may be worth it in the long run given the clout preapprovals have.

If you’re a current homeowner, tapping into your equity with a home equity loan or cash out refinance from Discover® Home Loans may help you make renovations that could potentially increase the value of your home.

Please note: Discover Home Loans does not offer purchase mortgages, or pre-qualification or pre-approval letters.