Homebuyers often use pre-approval and prequalification to determine how much they may be able to borrow for their home purchase. Find out why pre-approval is more reliable.

  • Mortgage prequalification typically involves answering questions about your financial position to assess whether you are likely to qualify for a home loan.
  • Mortgage pre-approval typically involves a review of your financial records and credit score to determine your ability to qualify for a home loan, the maximum loan amount, and the current interest rate. 
  • Pre-approval carries more weight and may be used to inform your budget and show sellers that you are a serious buyer.

For any homebuyer needing financing to purchase a property, mortgage prequalification and pre-approval are important steps in securing a home loan. However, there is some confusion regarding pre-approval vs. prequalification among buyers, which is understandable given that the precise meanings of these terms may vary by lender.[1]

While there is no industry-wide consensus on the specifics of each term, many lenders do agree on the basic differences between these complementary concepts.[2] This article will explore the differences between pre-approval and prequalification to help you determine which process is the better fit for you in the current stage of your homebuying journey.  

The Role of Prequalification and Pre-Approval in the Mortgage Process

Prequalification and pre-approval both help assess a homebuyer’s ability to qualify for a mortgage loan.[1] However, one may provide more assurance of securing a home loan than the other, so it’s important to understand the process, purpose, and limitations of each. 

What Is Mortgage Prequalification?

Mortgage prequalification is the generally agreed-upon term for when you provide basic details about your personal finances and credit score to determine if you are likely to qualify for a home loan based on that information.[2]

While the specific questions asked and details of the results may vary by lender, the process is largely the same across the mortgage industry. You answer questions about your current income, debts, assets, and credit history, and the lender responds with a pre-qualification letter stating whether they would be willing to loan you funds, and if so, how much.[2]    

What Is Mortgage Pre-Approval? 

Mortgage pre-approval is the generally agreed-upon term for when you submit financial documents to your lender so they can review actual evidence of your financial position to determine if you are likely to qualify for a home loan.[2]  

The financial documents may include proof of income (such as pay stubs and/or tax returns), proof of assets (such as bank and/or investment account statements), and permission for the lender to pull their credit report.[2]  

Once the pre-approval review is completed, eligible approved borrowers will receive a pre-approval letter that shows them the maximum home loan amount they may qualify for. They can then use that letter when making offers on a home to show sellers that they are qualified. 

The pre-approval process tends to be more rigorous than prequalification. Therefore, the result of a pre-approval may be more reliable than that of a prequalification.[2]  

Prequalification vs. Pre-Approval for a Mortgage

The key similarity between prequalification and pre-approval is the goal of helping buyers understand whether they are likely to qualify for a home loan, and if so, how much they may be able to borrow. It is also important to understand that neither prequalification nor pre-approval represents a guarantee from the lender.[1] Whether you have been prequalified, pre-approved, or both, you still need to complete a mortgage application and undergo the formal underwriting process before the lender may fund the loan. Pre-approvals are generally reliable, but they should not be mistaken for guarantees.  

There are several key differences between prequalification and pre-approval, including:[2]

  • Process. Prequalification relies on self-reported information, while pre-approval typically requires a review of financial documents.
  • Credit check requirements. Credit check requirements may vary by lender, but in many cases, a “hard credit check” is not required for prequalification, but is required for pre-approval. The credit check provides the lender with information needed to determine if you qualify for a mortgage loan and will be a contributing factor in determining what mortgage interest rate you may be offered. Importantly, a hard credit check shows up as an “inquiry” on your credit report, which may potentially cause a temporary dip in your credit score. However, if you are getting quotes from multiple lenders in quick succession, credit bureaus may typically lump multiple inquiries into a single inquiry to minimize the effect on your credit score.
  • Timeline. Prequalification is usually quick and easy, often taking only minutes to answer questions and receive your results (which may be automated). Pre-approval typically takes longer because you need to gather and upload documentation, which then must be reviewed before you may receive the results. The timeframe varies by lender and may depend on their current workload, but it may take hours or even days to receive your results.
  • Reliability. Pre-approval is typically deemed more reliable since it is based on financial documentation rather than self-reported information. 
  • Primary purpose. Prequalification is primarily used by homebuyers in the early stages to make sure they can qualify for a mortgage and budget for the purchase. Pre-approval is typically used to show real estate agents and home sellers that you are serious and qualified, which may incentivize agents and sellers to work with you.
  • Validity period. As an informal estimate, prequalification letters may not have an expiration date. Pre-approval letters, on the other hand, are often valid for 30-60 days.[3] PNC pre-approval letters are valid for 90 days. 

 

Locked Purchase Price

Locking in the purchase price can be particularly beneficial when home values rise faster than expected. For example, if a two-year rent-to-own agreement specifies a purchase price of $500,000, but the market performs well, and the value of the home is $525,000 at the time of purchase, the renter gets to buy the home for less than the market value.