Key Takeaways:
- Prequalification letters provide borrowers with an estimate of how much they can afford to borrow for a house.
- Prequalification relies on self-reported information and can be obtained in a matter of minutes.
- Sellers and agents prefer preapproval letters over prequalification letters because they’re a stronger signal that the borrower is seriously considering buying.
One of the most important steps in the homebuying process is determining how much house you can afford. Getting prequalified for a mortgage can help you estimate how much you may be able to borrow and set expectations early. In this article, we’ll explain what a prequalification letter is, what information it provides, and when it makes sense to get one.
What is a prequalification letter?
Prequalification letters detail how much a lender thinks you’re able to borrow to buy a house. While they may include some vetting, like self-reported financial information or a credit check, these are relatively informal and an early step in the homebuying process. Because the information is typically self-reported and not fully verified, the estimate is meant to be a starting point rather than a guaranteed loan amount.
Prequalification can help buyers get a general sense of their budget before moving further into the home buying process. You can easily get prequalified online, and it only takes a few minutes.
How to get a prequalification letter
The process of getting a prequalification letter is quick and simple:
- Choose a bank, credit union, or online lender.
- Provide basic financial information like income, debt, total assets, and your estimated down payment.
- Undergo a soft credit check (this step is optional).
- Receive the prequalification letter, either in the mail or via email.
Many lenders provide estimates the same day, and the process typically doesn’t require extensive documentation. You can also compare lenders without being forced to commit.
Are prequalification letters always needed when buying a house?
Prequalification letters are not required if you’re looking to buy a house. Buyers can skip that process and go straight to preapproval. This doesn’t mean that prequalification is a waste of time. Getting prequalified is an excellent way for prospective buyers to gauge what they can afford in the housing market. If a buyer has concerns about their credit score or financial readiness, a prequalification can help them address those questions.
With that being said, house-hunters who have done their research and are ready to submit an offer can skip straight to preapproval. Sellers and agents often prioritize buyers with preapproval letters.
In general, prequalification is useful for early planning, while preapproval is more important once you’re ready to make an offer.
How long is a prequalification letter good for?
Prequalification letters tend to be valid for between 30 and 90 days. After this time passes, you’ll need to reapply with your updated financial information.
Because financial situations can change quickly, it’s important that your prequalification letter is recent and is based on accurate and timely data. Changes in income, employment, or debt can make an earlier estimate outdated.
What is a preapproval letter?
Preapproval letters give a more verified assessment of what you can afford to borrow for a house. This estimate is based on documented, verifiable information like pay stubs, W-2s, bank statements, and a detailed credit check.
Because the financial information is backed up with documentation, preapprovals tend to be more accurate than prequalifications. They also serve as a better indicator of which loans you’re eligible for. Even with preapproval, final loan approval is not guaranteed and depends on additional underwriting and property review.
How are prequalification letters and preapproval letters different?
“Prequalification” and “preappoval” are sometimes used interchangeably, but they aren’t necessarily the same. Both processes are similar in the sense that they both give home buyers a sense of what they can afford to borrow for a house. The short answer is that preapproval gives a more in-depth and verified estimate than prequalification.
Here are some of the key differences:
Verification
- Prequalification: Self-reported information that is typically not verified
- Preapproval: Financial information is documented and verified
Accuracy
- Prequalification: Provides a general estimate
- Preapproval: Provides a more precise loan amount
Credit check
- Prequalification: May involve a soft or limited credit check
- Preapproval: Requires a more detailed credit review
Buyer intent
- Prequalification: Signals early interest
- Preapproval: Signals a stronger intent to buy and greater financial readiness
FAQs about prequalification letters
Does a prequalification letter require a credit check?
Prequalifications are based on the financial information you provide and may involve a credit check, but that’s not always the case. When it does, it’s often a soft inquiry that typically does not impact your credit score.
Does a prequalification letter guarantee that you’ll be approved for a mortgage?
Prequalifying for a loan doesn’t mean you’ll automatically be approved for a mortgage. The prequalification letter only provides an estimate based on self-reported information. Preapproval provides a more precise picture, but also won’t guarantee approval.
Is a prequalification letter enough to make an offer on a house?
If you want your offer to be seriously considered, you should get preapproved. Sellers prefer preapprovals over prequalification, so only being prequalified would put you at a disadvantage in a bidding war.