Before you start making offers on houses, you will want to be pre-approved for a mortgage.
Being pre-qualified isn’t enough.
This article will focus on the key differences between mortgage pre-approvals and prequalifications.
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What is a Mortgage Prequalification?
To prequalify someone for a loan, a lender will perform a soft credit inquiry. A soft inquiry does not affect your credit in any way. The lender receives a very basic look into your credit history without providing your credit score or any detailed account information. They use this soft pull to judge the likelihood someone will be approved for a loan.
The reasons for getting a mortgage prequalification are to get a basic idea of the loan amount you will be approved for and to see if it is worth it to have a lender perform a credit check (which does affect your credit score).
If you are prequalified for a loan amount that interests you, the next step would be to get preapproved.
Pre-Qualification Letter
Example of what a pre-qualification letter looks like:
What is a Mortgage Preapproval?
Getting preapproved for a mortgage is a much different process than being prequalified. You will need to provide documents proving your employment, income, and assets to a lender.
To get preapproved, the lender will perform a hard inquiry, which does appear on your report and affects your score. They will also verify your income using w2’s tax returns and paystubs. They will also verify you have the assets for the down payment with a copy of a recent bank statement. The lender uses your debt-to-income ratio to calculate the loan amount you will be approved for.
Hard Credit Pull
- Pull your credit history and scores from all three major credit bureaus.
- It does count as a hard inquiry and will appear on your credit report for two years.
- Having too many credit inquiries can negatively affect your credit score.
Proof of Income
- Tax returns and W2’s from the last two years
- Last 30 days worth of paycheck stubs
Proof of Assets
- Last couple months of bank statements, 401k or IRA statements from where your down payment funds will come from
- If receiving down payment as a gift, a gift letter is needed along with the last 2 months of bank statements from the person gifting the funds.
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Pre-Approval Letter
Example of what a pre-approval letter looks like:
Prequalification vs. Preapproval
Being pre-qualified means you meet the basic requirements for a mortgage loan based on a soft credit inquiry. However, it is not a guarantee you will be approved for a mortgage loan.
Think of the prequalified credit card offers you receive in the mail; it’s the same thing. They have not seen your credit report and have no idea what your income is, but based on a soft credit pull; you have a good chance of being approved.
When you submit your offer on a home, usually, it will be accompanied by a mortgage preapproval letter; a prequalification will not be accepted. In fact, may realtors will not even start showing you homes without first having a preapproval letter from a lender.
What is a Certified Homebuyer?
A certified homebuyer means that you have already gone through the mortgage underwriting process. Underwriting is where many loans fall apart because underwriting must verify every piece of documentation you provide that your loan officer may miss.
Usually, your loan is submitted to underwriting after submitting all your documents and a purchase contract to your loan officer. Underwriting uncovers issues that are not always seen on the surface, which is why being preapproved for a mortgage is still not a guarantee you will actually get the loan.
Not many lenders offer this option, and most home sellers have no idea what it is, so if you are not a certified homebuyer, it should not matter that much. A mortgage preapproval letter is often all you will need to submit a competitive home offer.
Frequently Asked Questions
Is prequalification the same as preapproval?
Being preapproved carries a lot more weight than being prequalified. Most sellers will not accept a prequalification letter and will need to see a preapproval.
Does mortgage prequalification affect credit score?
A prequalification involves performing a soft credit inquiry that does not affect your credit score.
Does preapproval hurt your credit?
Yes. When you submit your documents to get preapproved for a mortgage, the lender will perform a hard credit inquiry, which will be reported to the credit bureaus.
How long does a preapproval last?
A preapproval or prequalification letter for a mortgage will last 60-90 days.
The Bottom Line
Being prequalified or preapproved for a mortgage loan will give you an idea of how much of a home you will qualify for.
However, being preapproved for a mortgage means a lot more than being prequalified.
A preapproval requires a credit check along with income and asset verification documents such as tax returns, w2’s and bank statements.
Most sellers won’t accept home offers with a prequalification letter attached; they will want to see a preapproval letter. Many real estate agents won’t even take you out to view homes unless you’re preapproved.
