Preapproval or Prequalification: Pros and Cons for Homebuyers

Is a Prequalification Letter Better Than a Preapproval? How potential homebuyers get approved for a home loan has changed significantly over the past few decades. New regulations and new mortgage lenders have led traditional banks to compete with brokerage firms, credit unions, and online banks.

But the basics haven’t changed. Any homebuyer not making an all-cash offer is likely turning to financial institutions to help with their home purchase. And how do you prove to a buyer that you can get the home loan and won’t let the deal fall through? That’s where the prequalification and preapproval letters come in handy.

Is there a difference in being prequalified vs preapproved? They sound similar in that they both give the potential buyer a price range of how much they can borrow, but key differences affect the buyer’s chances of standing out from the crowd. Learn more about the purpose and advantage of each letter.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

How Prequalification Letters Work

Think of a prequalification letter for a home loan as a preliminary step to the preapproval letter. With a prequalification, buyers do not have to give detailed information regarding their income, savings, and assets. Once mortgage lenders collect the information, they may do a quick background check into the client’s accounts and financial data. However, they’re more likely to give their numbers based on the buyer’s shared information. That’s why the mortgage prequalification process may only take a few hours. The potential lender gives a rough estimate of how much home a buyer can afford with financing, but it’s not necessarily based on anything more than the buyer’s word.

How Preapproval Letters Work

A preapproval letter for a home loan is a much lengthier process. A mortgage lender takes the time to collect and verify everything from pay stubs to W-2 forms to tax returns.

Buyers need to fill out a mortgage application and give permission for lenders to run an official credit check as part of the thorough financial review. The lender will pull your entire credit report and credit score. The lender will want proof of income and verification of employment through pay stubs, tax returns, and bank statements. They’ll also review your debts, including the type of loans, credit card limits, payment history, and utilization.

By requiring this information, mortgage lenders make buyers prove the state of their financial affairs. Once the lender has reviewed the application and buyer’s assets, they’ll determine how much of a home loan the buyer is approved for. This number is technically a commitment from the lender, though it is not an unconditional promise. Lenders also give borrowers the loan terms, including the interest rates the buyer can expect.

A few things to note about how mortgage preapproval letters work:

Buyers may or may not be locked into the interest rates for a given period of time.
The cost of a preapproval letter ranges from free to several hundred dollars.
A prequalification letter is not required if the buyer has a preapproval.

The pre-approved offer is a conditional commitment to finance the home purchase as long as the underwriting process verifies the financial history is accurate and the buyer meets all conditions. Final loan approval will not come until underwriting is complete.

Which Is Better–Prequalified Vs Preapproved?

Buyers learning about the mortgage process or considering a home purchase could benefit from a home loan prequalification letter. Talking to a loan officer about a prequalification letter is a great way to start the conversation about how much the buyer can afford. It’s a less formal and quick process. The check for prequalification can often be done with an easy online application that doesn’t require Social Security numbers, credit histories, or a hard inquiry.

If the buyer is in a true buyer’s market, a prequalification letter may be enough to satisfy a seller. However, in most housing markets, buyers will need the pre-approval letter to submit a purchase offer on a home.

House hunters further along in the homebuying process should go straight to a preapproval letter if they hope to compete against other buyers. This is especially the case in competitive markets, where homes receive multiple offers the week they go on the market. By this stage, the potential buyer should have already shopped around mortgage lenders and have a good idea of the type of loan they’ll be applying for.

Before seeking the preapproval letter for the home loan, they should learn the terms of the lender’s letter (e.g., cost, interest rate lockdowns, etc.). One important caveat is that neither kind of letter is fully guaranteed. While it’s less likely that a lender will back out of the loan in the case of a preapproval, it’s not impossible. The credit check might reveal something that has them adjust loan terms, like the interest rate.

Common Stipulations

Lenders may know everything there is to know about the buyer’s finances when running a mortgage preapproval application, but they don’t necessarily know anything about the property. That’s why a home appraisal is a condition of financing. If the home’s appraised value comes in way below the requested loan amount, there could an issue with the bank.

Other situations may crop up during the buying process.

If the seller’s ex-spouse is contesting the sale of the home, the lender may reserve the right to rescind the offer until the ownership resolution is decided. By this time, the buyer may have lost the original terms of the loan because of fluctuating market conditions. This would cause their interest rates to change, and not always for the better.

Other potential complications when seeking a home loan prequalification vs a preapproval letter include the buyer wrapping the closing costs in the loan amount. That may change the buyer’s loan-to-value ratio, required downpayment, or debt-to-income ratio. Becoming a high-risk borrower could cause the lender to back out of the sale entirely. Similarly, if the home buyer loses their job between the time of their preapproval application and closing, the lender may withdraw the offer.

Difference Between Preapproval and Prequalification

The preapproval letter may be the more valuable document from mortgage lenders, but both serve a purpose for buyers. Buyers not very far along in the home search process don’t have to gather all their financial documents together for a preapproval letter. Nor will they have to pay the lender their underwriting fee. Still, the preapproval letter is likely to go further in showing the seller the buyer is serious about the home purchase.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Updated August 2024

Preston Guyton Founder @ ez Home Search

Preston Guyton has spent 20+ years helping people find the right home—and helping them avoid the costly mistakes that often come from not knowing their options. As the founder of ez Home Search, he’s leading the charge to build a better way to discover real estate—one that puts your privacy first, delivers accurate information, and gives you the confidence to make informed decisions. Preston has assembled a powerhouse team—made up of the innovators behind many of the technologies people use every day—to build the tools and transparency that deliver on a single mission: A Better Way To Discover Real Estate.