Buyers: Preapproval vs Prequalified Letter

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If you're ready to get serious about your home buying journey, one of the first steps is to start researching various lenders. As you become more familiar with the process, you'll likely hear the terms preapproval and prequalified mentioned again and again. We'll look at how each letter works and what you should know before approaching a home seller. 

Prequalification Vs. Preapproval 

The key difference between a preapproval and prequalification is that the preapproval letter is much more involved. With a prequalification, the lender will look at the general state of the buyer's assets before estimating how much home they're likely to afford. Lenders are not diving into the buyer's past, which can make real estate agents wary of accepting prequalification letters. 

Preapproval 

With a preapproval letter, you're typically asked to provide the following:

• Two year's worth of W2s/Tax returns
• A month's worth of paystubs 
• Two month's worth of bank statements 
• Social security card 

Considering the amount of paperwork you need to provide (and the lender needs to process), preapproval letters can a week or more to generate. On the other hand, a prequalification letter can be procured in less than 24 hours. 

Additional Facts 

Here are a few facts that can help you know more about what to expect:

• Preapproval letters may require upfront costs to generate. We recommend checking with your financial institution, in addition to mortgage brokers, because you already have a relationship with your bank, and they offer an existing customer discount.  
• You may be able to lock down interest rates at the time of your preapproval letter. This is exceptionally helpful for those who want to know what their payments will be down to the penny. 
• Make sure to calculate closing costs beforehand so you know exactly how much you'll owe out-of-pocket. 

Does It Help to Have Both?

Not necessarily. Prequalification letters are generally recommended for homebuyers who may not know for sure if they're ready to buy. It's a general indication of how much money you'll get, which can help you decide if it's enough to get a preapproval letter. If you're in a buyer's market, you may be able to get away with a prequalification. However, it's generally the far less coveted letter that you can have. 

A preapproval letter is definitely the best letter you can take to a seller when you're ready to make an offer on a home, but it's important to note that even these letters aren't a guarantee of financing approval.  For example, if a major event occurs (e.g., a job loss, etc.) between when your financial institution issued the letter and when you close on the home, your financing could be denied.  Talking to a real estate agent or financial expert can make it easier to navigate the process.