If buying a home is on your radar, you’ve probably heard the terms prequalification and preapproval. They sound similar, and both can help you better understand your homebuying budget, but they aren’t exactly the same.
Knowing the difference can help you determine which step makes sense based on where you are in your homebuying journey.
What is Mortgage Prequalification?
Mortgage prequalification is often an early step for prospective homebuyers. It can estimate how much you may be able to borrow based on the financial information you provide, such as your income, assets, and existing debt.
Think of prequalification as a starting point. You may not be ready to make an offer on a home yet, but you want to understand what could realistically fit within your budget.
A prequalification can be particularly helpful if you:
- Are beginning to think about buying a home
- Want a better idea of your potential price range
- Are comparing renting versus buying
- Want to identify financial areas you may need to work on before seriously shopping
Because prequalification is based on preliminary information, the amount you’re ultimately approved to borrow may change after a full review of your finances.
What is Mortgage Preapproval?
A mortgage preapproval is generally a more detailed step. During the preapproval process, the lender reviews and verifies additional financial information. This may include your income, assets, debt and credit history. You may also need to provide documentation such as pay stubs, bank statements or tax information.
If you meet the lender’s initial requirements, you may receive a preapproval letter showing how much you could potentially borrow, subject to the lender’s conditions and final approval.
A preapproval can be especially helpful once you’re ready to actively shop for a home. In a competitive market, sellers and real estate agents may also see a preapproval letter as a sign that you’ve already taken important steps to secure financing.
Prequalification vs. Preapproval: Which One Do You Need?
The answer may depend on how close you are to buying.
If you’re starting to explore your options, getting prequalified can help you understand how much you may be able to afford.
If you’re ready to actively shop for a home, getting preapproved may make more sense since the lender will take a closer look at your finances.
Neither one guarantees that you’ll ultimately receive a mortgage. Final approval typically occurs later on in the process, after you select a property, complete a formal mortgage application, and satisfy the lender’s underwriting requirements.
Don’t Let Your Maximum Determine Your Budget
Whether you receive a prequalification or preapproval, remember that the amount you may qualify to borrow and the amount you’re comfortable spending aren’t necessarily the same.
Your monthly mortgage payment is just one part of the cost of owning a home. Your budget will also need to cover property taxes, homeowners insurance, utilities, maintenance, potential repairs, and other ongoing expenses.
Before deciding on a price range, take a close look at your overall monthly budget and consider which payment option allows you to continue working toward your other financial goals.
You don’t need to shop at the very top of your borrowing range, choose an amount that feels comfortable for you.
Prepare Before You Start the Process
Whether you’re seeking prequalification or preapproval, it helps to have a clear picture of your finances.
Before speaking with a lender, consider reviewing:
- Your monthly income
- Your current debt and monthly payments
- Your savings available for a down payment and closing costs
- Your credit history
- Your anticipated homebuying budget
- Other financial goals and expenses you need to account for
Getting organized early can also help you have a more productive conversation with your lender about your options. For a step-by-step overview of what to expect throughout the mortgage process, check out our Homebuyer’s Guidebook.
Take the First Step with First Financial
You don’t have to figure out the mortgage process on your own. First Financial offers mortgage prequalification and preapproval options to help prospective homebuyers within Monmouth or Ocean Counties take the next step with greater confidence.*
If you’re just beginning to shop, a prequalification letter can help you better understand your potential price range. If you’re ready to take your home search to the next step, our team can help you explore the preapproval process and your available mortgage options. Get started with our quick mortgage preapproval inquiry form.
Wherever you are in your homebuying journey, starting the conversation early can help you understand your options, prepare financially, and shop with a clearer picture of what may work for you.
Ready to get started with First Financial? Schedule a video chat or phone call with our Mortgage Team or call 732-312-1500, Option 4.*
*Subject to credit approval. Minimum mortgage loan amount is $100,000. Available on primary residence only. Mortgage insurance may be required depending on loan guidelines. This is not a credit decision or a commitment to lend. See Credit Union for details. A First Financial membership is required to obtain a Mortgage and is open to anyone who lives, works, worships, volunteers, or attends school in Monmouth or Ocean Counties. Qualified borrowers must meet eligibility requirements including, but not limited to, property location, loan amount, loan type, occupancy, property type, loan-to-value, debt-to-income ratios, FICO credit scores, refinance with cash out and other variables. A $5 deposit in a base savings account is required for credit union membership prior to opening any other account or loan. Other terms & conditions may apply, see the credit union for details.
NMLS CU ID: 685814. Equal Housing Lender.
