Prequalified and preapproved are two common terms you hear when it comes to getting a mortgage. But it’s important to know they are very different things.
A prequalification takes 15 to 30 minutes and involves a few quick questions.
You typically do this before you look for a home.
At this point, the lender takes your word that everything you state is correct and will verify it at a later date.
A credit check is run, then all the information provided is put through an automated underwriting system, which will provide a preliminary status.
At the end of the process you’ll have an idea of how much money you can borrow, and often you will be issued a prequalification letter that states that a credit check has been run and, based on the information provided but not yet verified, you qualified for a specific dollar amount.
Real estate agents will often ask for prequalification letters in the same amount of an offer they intend to submit on a property.
Sellers, knowing that a buyer can afford much more than they are asking for a property, will be less likely to negotiate downward or offer concessions.
A preapproval letter is much more involved.
It will only be issued after all the paperwork is received by the lender. This includes so much more than income and assets, such as the sales contract, the title to the property and an appraisal, most of which are sought after a contract is submitted and accepted by the sellers.
Lenders issue a conditional commitment letter between the contract date and the closing date. This basically says that the lender intends to lend money to the borrower but is verifying information before issuing a full approval.