Mortgage Prequalification vs. Preapproval – What’s the difference?

Jason Kauffman | March 16, 2022

We get many questions from borrowers, as they begin the homebuying process, about whether they should get prequalified or preapproved. The answer more often than not is that you should do both. Getting prequalified is the first step in a simple process that every borrower should take to get preapproved before they start looking for a home.

The prequalification process typically starts by submitting a prequalification form on our website or relaying your information to a licensed mortgage loan originator over the phone, although occasionally people will walk into our office to do this face to face. The prequalification process involves us collecting information about your employment history, residence history, income and assets, and personal info (SSN, DOB, contact info, etc).

There are also a series of questions that help us further identify what you will qualify for:

• What is the max monthly payment you would be comfortable with?
• What is the max you would be able to bring as a down payment?
• Any idea about where you want to buy? Type of home (Single Family, townhouse, condo, etc)?

Once we have all that information, we are ready to build a file in our system, pull a credit report, and begin outlining the loan options that are available to you. This includes generating estimates with fully itemized fees and interest rates for TBD (To Be Determined) property addresses. We’re even able to issue a prequalification letter as needed.

So now you’re prequalified, but we haven’t confirmed any of the data you submitted.

This is where the preapproval process begins. Following prequalification we will request supporting documentation for you to provide through our secure borrower portal. Supporting documentation is dependent on the different characteristics of your borrower profile, but a typical list for an hourly or salaried individual is:

• 2020 and 2021 W2 forms
• Most recent YTD paystub(s) covering 1 month’s pay
• 2 months of statements for Checking and Savings Accounts (All Pages)
• Driver’s License Copy

Its not uncommon for a borrower to go through the prequalification process but stop once they get to the preapproval process. This can be a big mistake for many different reasons.

We discover so much about our borrowers during the preapproval process. The most common discovery is that the borrower makes more money than they stated on the prequalification form. Or maybe they make bonus or overtime income that we can use to qualify them for a higher purchase price. Sometimes we find out that someone who is self-employed earns less income than they thought.

All of these discoveries allow us to give our borrowers a clearer picture of what they qualify for so that they are not missing out on opportunities they could’ve qualified for, or discovering that they don’t qualify after they are under contract and deep into the loan process.

Following receipt of the supporting documentation we run the loan through an Automated Underwriting System (AUS) and present the file to an underwriter for review. This allows us to get answers to the sometimes tough questions about a persons income calculation so that we know what we can use for qualifying.

Following these steps, we’re able to issue a pre-approval letter for a TBD property address. What we suggest is having us update the preapproval letter to make it property specific as you make offers on properties. Tailoring the letter to a particular property allows us to check the specific characteristic of the property prior to you making an offer. It also lets us generate property specific estimates for you to review when making an offer while double-checking your qualifications.

Preapproval letters are good for 90 days from the date the credit report is pulled. It is important to speak with your loan officer about any changes you are thinking of making with your employment during this period of time. Last minute employment or income changes can dramatically change what you qualify for and are best discussed prior to making a decision.

Once preapproved, the sellers and listing agents that you are submitting your offers to will know that you are ready to purchase once the offer is accepted. In a market with a surplus of buyers, getting preapproved is a prerequisite for having your offers taken seriously.

Consider reaching out to one of our originators today to talk about the preapproval process and how smooth it can make your next purchase.