The Difference Between Prequalification and Preapproval

by Kent Kopen | Mar 2, 2015
Why is a mortgage Preapproval so much better than just getting Prequalified?  Many people think they are the same but they’re not.  In today’s market you want the right one to save you time, money and unnecessary legal headaches. A prequalification is a lender’s estimate of how much you could be eligible to borrow based on information you supply.  Preapproval means the lender is ready to make you a mortgage loan based on information and documentation you provided at the time you requested the preapproval.*  A prequalification doesn’t mean a loan can be done; especially since today’s lender guidelines are interpreted much stricter than in the past.  That is what is meant by “credit remains tight.” The prequalification process usually goes like this: a buyer contacts a mortgage broker; the broker asks them how much they make, how much of a down payment they have, and if their credit is good.  Sometimes, they pull a credit report.  The broker sends back a letter stating the buyer is ‘prequalified’ for a specific loan amount and purchase price.  The prequalification is full of disclaimers, as it must be, because the lender has not reviewed any of the borrower’s documents. In contrast, a preapproval is basically an underwritten loan in terms of credit, income, and assets.  What remains to be reviewed are the purchase agreement and appraisal.  For a preapproval, documentation was provided by the borrower and reviewed by the lender; including a two-year work history, paystubs, tax returns, and bank statements. A prequalification doesn’t reveal issues that could be a problem, including…...