What is the difference between prequalifying and getting preapproval for a loan?

To prequalify for a loan, you give a lender some basic financial information and in return they tell you a rough estimate of the type of loan you should consider and how much you would qualify for in that program. This is generally a very informal process, as the data you provide will not be verified. A prequalification is only a preliminary determination of your eligibility for a loan and as a consequence, there is no commitment by the lender to actually fund the loan.

A preapproval is a more thorough process that requires submitting a full application and includes a credit check and employment verification. The lender will obtain your credit report to review whether you have a history of paying your bills on time. In addition, you will be asked to provide documentation of your income, as well as recent statements for all checking, savings or other asset accounts. It is important to note that even though the preapproval process is more rigorous, obtaining a preapproval still does not guarantee that the lender will ultimately fund your loan. Lenders will still need to look at property appraisals, verify your information and potentially check your credit again before agreeing to make a loan.

Is a preapproval worth it?

Since neither a preapproval nor a prequalification guarantees that the lender will give you a loan, you may wonder why you should go through the hassle. One reason to get a preapproval is so that you can shop for a house with a better understanding of how much you can afford. Another reason is that it may give you an edge in a competitive housing market. If there are multiple bids for a home, having a preapproval for a loan will give the seller more confidence that you can indeed get the necessary financing, increasing their confidence in the transaction and ultimately making your offer more attractive.