Mortgage prequalification vs. preapproval

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Ask a Lender
November 15, 2016 | Updated September 20, 2017

Key Points

Preapproval vs. prequalification

  • Prequalification lets borrowers know the maximum loan for which they could be approved.
  • Preapproval requires a deeper dive into a borrower's finances and commits to lending.
  • If done within 45 days, multiple prequalification and preapproval letters shouldn't affect your credit.

If you visit the websites of many mortgage brokers, banks or other lenders, you're likely to find information encouraging you to get prequalified for a loan. Talk to a lender or Realtor, and they will likely mention how important it is to get preapproved for a loan.

The terms sound similar, as if they could be interchangeable. But there is a big difference, and understanding that difference could be key to making a successful offer on your dream house.

The basics

The Federal Deposit Insurance Corp. (FDIC) defines prequalification as follows: "Frequently, lenders provide certificates indicating the maximum loan for which borrowers would qualify, usually subject to a satisfactory property appraisal and further verification of income, employment and credit history. Some prequalification programs even provide a preliminary evaluation of credit history."

Essentially, prequalification is an early indicator that you will be able to obtain a loan up to a certain amount, but with no guarantees. Many prequalifications are done without any comprehensive checks or verifications of borrowers' finances, and can change after those checks are completed. Many times, they are used as a tool to let prospective homebuyers know how much house they likely can afford.

Preapprovals, however, typically carry more weight. The FDIC describes a preapproval as follows: "The financial institution, after a comprehensive analysis of the creditworthiness of the applicant, issues a written commitment to the applicant valid for a designated period of time to extend a home-purchase loan up to a specified amount."

That "written commitment" is key, particularly for home sellers. It means that there are likely to be no hiccups or delays when it comes to funding the home loan. That could make a difference when sellers are choosing among multiple offers.

The Consumer Financial Protection Bureau (CFPB), however, downplays the distinction between the two terms, saying "there's not a lot of difference" between a prequalification and preapproval, and that the terms may vary in meaning from lender to lender. Instead, the agency says the important thing is to assure the letter, regardless of what it's called, contains the information that matters to local sellers.

"The important thing is that the letter you receive provides enough information for sellers in your area to take it seriously," the CFPB says. "The best way to make sure that the letter you have will serve its purpose is to ask a local real estate agent."

Credit issues

A typical preapproval process, and some prequalification processes, includes credit checks of the prospective borrowers. The thought of going through that process with multiple lenders can be scary to would-be homebuyers, who may worry that having multiple credit checks in a short period of time will negatively impact their credit. 

Fortunately, that is not the case. All credit inquiries from mortgage lenders or brokers over a 45-day period will count as only one credit check, no matter how many lenders or brokers perform those checks. This allows prospective homebuyers to shop around and get multiple prequalifications, preapprovals or loan estimates without fear of what will happen to their credit score.

"Even if a lender needs to check your credit after the 45-day window is over, shopping around is usually still worth it," the CFPB says. "The impact of an additional inquiry is small, while shopping around for the best deal can save you a lot of money in the long run."

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