When it comes to house hunting, you’ll often hear people stress the importance of getting “prequalified" or “preapproved" for a mortgage. But what’s the difference between the two? Keep reading to find out.

Prequalification:

Prequalification is an informal assessment of your financial situation based on self-reported information. It provides a rough estimate of how much you might be able to borrow.

Process: You provide basic financial information to a lender, such as your income, debts, and assets. The lender uses this information to give you an idea of the mortgage amount you might qualify for.

Verification: No formal verification of the provided information is done during prequalification. It's a preliminary step and does not carry the same weight as a preapproval.

Usefulness: Prequalification is helpful for getting a general sense of your budget early in the home-buying process. However, it doesn't carry as much weight in a competitive real estate market.

Preapproval:

Preapproval is a more formal and comprehensive process. It involves a detailed analysis of your financial situation by a lender, including a credit check and document verification.

Process: You submit a mortgage application, and the lender evaluates your creditworthiness, income, employment history, and other relevant financial details. The lender may also ask for supporting documentation, such as pay stubs, tax returns, and bank statements.

Verification: Preapproval involves a thorough verification of the information you provide, making it a more reliable indication of your borrowing capacity.

Usefulness: A preapproval letter is a strong signal to sellers that you are a serious and qualified buyer. It can give you a competitive edge in a competitive real estate market, as sellers may view your offer more favorably compared to a buyer with only a prequalification.

While prequalification provides a basic estimate of your borrowing capacity based on self-reported information, preapproval is a more rigorous process involving a credit check and document verification. A preapproval letter is generally more valuable when making an offer on a home, as it demonstrates to sellers that you are a qualified buyer.

Whether you choose to get prequalified or preapproved depends on where you are in the home buying process. If you’re just starting to search, getting prequalified will help give you an idea of how much you have to spend. As you get closer to selecting the right property, you’ll likely want to get preapproved so you can quickly make an offer when the right place comes along.