Prequalification vs. Preapproval: What’s the Difference? And Why I Want You to Get a Preapproval
You’ve probably heard both terms:
Prequalification.
Preapproval.
They sound almost identical.
They’re not necessarily the same thing.
And I’m going to tell you right up front:
I want you to get a preapproval before we get serious about looking at homes.
Here’s why.
Let’s Start With Prequalification
A prequalification is generally an early estimate of how much you may be able to borrow.
The problem is that the word “prequalification” doesn’t tell you how thoroughly the lender actually reviewed your finances.
Some lenders may base a prequalification largely on information you provide. Other lenders may do a much deeper review.
The Consumer Financial Protection Bureau specifically points out that lenders use the terms prequalification and preapproval differently. Some lenders may issue a prequalification based on unverified information you report and reserve preapproval for situations where information has been verified.
So here’s my concern:
Someone asks you a few questions.
You give them your income, debts and approximate credit information.
They put some numbers into a system.
And then you hear:
“You’re prequalified for $500,000!”
Okay…
But what did they actually verify?
That’s the question I want you asking.
Why I Don’t Want You Relying on a Basic Prequalification
I’m going to say this plainly:
A basic prequalification based primarily on information you provided isn’t what I want you relying on when you’re seriously shopping for a home.
It may be a useful starting point.
It may help you begin a conversation with a lender.
But I don’t want you falling in love with a $500,000 house because someone casually told you that you could probably qualify for $500,000.
Then we discover later that your actual financing doesn’t support that number.
That’s a terrible place to be.
So What Is a Preapproval?
A preapproval generally involves a more substantial review of your financial situation.
Depending on the lender and the process they use, that may include reviewing things such as:
- Income
- Assets
- Debts
- Credit history
- Employment
- Financial documentation
The CFPB notes that lenders vary in how much information and documentation they review when issuing a preapproval. Some do a much deeper review up front than others.
And this is important:
A preapproval is still not a guaranteed mortgage.
It is a lender’s tentative indication that they are willing to lend you up to a certain amount, based on assumptions and subject to additional requirements.
There is still a loan process.
There is still underwriting.
There is still a property to evaluate.
There are still conditions that have to be satisfied.
But a properly handled preapproval gives us a much better starting point.
Why I Want You to Get a Preapproval
This is about much more than having a piece of paper to show a seller.
1. I Want Us to Know What We’re Working With
Before we spend hours looking at houses, I want you to have a realistic idea of your purchasing power.
That doesn’t mean I want you shopping at the maximum amount the lender approves.
It means I want us to understand the numbers.
2. I Don’t Want You Falling in Love With a House You Can’t Buy
This happens.
You find the beautiful kitchen.
The backyard is perfect.
The neighborhood is exactly what you wanted.
You can already see where the Christmas tree is going to go.
And then…
The financing doesn’t work.
I’d rather have that conversation before you fall in love with the house.
3. It Helps Us Search More Efficiently
Once we have a reasonable idea of your financing, we can focus your search.
And remember:
Your preapproval amount is not your budget.
A lender may be willing to lend you more than you actually want to spend.
The CFPB makes this distinction very clearly: the lender determines what you may qualify for, but you determine what you’re comfortable paying.
Your life still has to happen after you make the mortgage payment.
4. It Can Strengthen Your Offer
When you’re ready to make an offer, the seller may want to know that you have taken steps to secure financing.
Sellers frequently require or expect a preapproval before accepting an offer.
It doesn’t guarantee that your offer will be accepted.
But it gives the seller information that you’re not simply guessing about your ability to buy.
5. It Can Uncover Problems Earlier
This is one of the reasons I want you to do this before we find the house.
If there’s an issue with your credit, income documentation, debt or something else affecting your ability to qualify, I’d rather know about it early.
Then we have time to figure out what needs to happen.
The CFPB specifically notes that getting preapproved earlier can help identify potential credit or documentation issues in time to address them.
Finding out six months before closing is a whole lot better than finding out six days before closing.
But Don’t Just Ask for a Preapproval Letter
This is where I want you to be a little more demanding.
Ask your lender:
What did you actually verify?
What documents did you review?
Did you check my credit?
What assumptions were made?
What could still cause a problem later?
What is my estimated monthly payment?
How much cash will I need to close?
Are there different loan programs or financing structures I should consider?
What should I absolutely NOT do between now and closing?
Those are good questions.
You should understand the answers.
And Here’s Another Important Point
Getting preapproved does not mean you have to use that lender.
A preapproval helps you shop, but it does not commit you to that lender for the final mortgage. The CFPB recommends comparing lenders and loan offers before making your final choice.
In fact, the CFPB recommends getting multiple preapprovals and comparing loan offers.
So don’t be afraid to shop around.
Preapproval Is Not the Same as “Go Spend This Much”
One of the biggest misconceptions I see is this:
“The lender approved me for $600,000, so I should shop for $600,000.”
No.
Your lender is looking at whether you may qualify for a certain amount.
You have to decide what fits your life.
Maybe $600,000 is perfectly comfortable for you.
Maybe you’d rather spend $450,000 and have more money available for travel, retirement, renovations, kids, hobbies or simply breathing room.
That’s your decision.
A mortgage approval is a financing number.
It is not a command to spend it.
My Bottom Line
If you’re just thinking about buying someday, a conversation with a lender can be a great place to start.
But when you’re ready to seriously shop for a home, I want you to have a real conversation with a qualified mortgage professional and pursue a preapproval.
Not because I want to rush you.
Not because I want you shopping at the top of your budget.
And not because I want you committed to a particular lender.
I want you prepared.
I want us to know what we’re working with.
I want you to understand your options.
And most importantly, I don’t want you finding your dream home first and discovering afterward that the financing doesn’t work.
That’s a conversation I’d much rather have with you before we start looking.
Have a Question?
Buying a home comes with a lot of questions. You don’t have to figure everything out on your own.
Have a question about something you read here? Want to talk through your situation? Or just not sure what your next step should be?
I’m happy to help.
Schedule a Time to Talk With Karyn
No pressure. No obligation. Just straight answers.
Prefer to just send me a question?