Some mortgage terms can be confusing, none more so than the similarities and differences between prequalification and preapproval. The two terms are often used interchangeably, but they mean very different things to lenders, real estate professionals and home sellers.
Prequalifying is a rough-idea process that tells you how much money you’ll likely be able to borrow to buy a home. You can prequalify yourself on any banking or real estate-related website simply by putting your salary, type of loan you want, down payment amount and a ballpark home price into a mortgage calculator. You can talk with a lender, who will also give you a ballpark amount without a credit check.
When you apply for a mortgage loan, you’ll share your income records, the source and amount of your down payment, and your social security number so the lender can pull your credit. This is the key difference between prequalification and preapproval – when the lender is able to review your application and verify your credit standing to make a lending decision.
The lender will get back to you within three days or less with a preapproval letter stating the maximum amount of money you’re approved to borrow.
Preapproval gives you the real numbers so you know exactly how much you can spend on a home. It lends you credibility with real estate professionals and with sellers who will take you seriously as a buyer.
Prequalification becomes preapproval once you have a purchase contract on a home. Then, the preapproval is real.