What is a prequalification letter?
Key Takeaways:
- Prequalification letters give borrowers an estimate of how much they can afford to borrow for a home.
- Prequalification is based on self-reported information and can be obtained in minutes.
- Sellers and agents prefer pre-approval letters to pre-qualification letters because they are a stronger signal that the borrower is seriously considering purchasing.
One of the most important steps in the home buying process is decisive how much house you can afford. To get qualify for a mortgage in advance can help you estimate how much you may be able to borrow and set expectations early. In this article, we explain what a prequalification letter is, what information it contains, and when it makes sense to get one.
What is a prequalification letter?
Prequalification letters indicate how much a lender thinks you can borrow to buy a home. While they may include some checking, such as self-reported financial information or a credit check, these are relatively informal and are an early step in the homebuying process. Because the information is typically self-reported and not fully verified, the estimate is intended as a starting point and not as a guaranteed loan amount.
Prequalification can help buyers get a general idea of their budget before moving forward with purchasing a home. You can easily get prequalified online and it only takes a few minutes.
How to Receive a Prequalification Letter
The process for obtaining a prequalification letter is quick and simple:
- Choose a bankcredit union or online lender.
- Provide basic financial information such as income, debts, total assets, and your estimated down payment.
- Undergo a gentle one credit check (this step is optional).
- Receive the prequalification letterby post or by e-mail.
Many lenders provide same-day estimates and the process typically does not require extensive documentation. You can also compare lenders without having to commit to doing so.
Are prequalification letters always required when buying a house?
Prequalification letters are not required if you want to purchase a home. Buyers can skip that process and go straight to it prior approval. This does not mean that prequalification is a waste of time. Obtaining pre-qualification is an excellent way for potential buyers to gauge what they can afford in the housing market. If a buyer is concerned about their credit score or financial preparedness, a prequalification can help them answer these questions.
That said, house hunters who have done their research and are ready to make an offer can skip straight to pre-approval. Sellers and agents often prioritize buyers with pre-approval letters.
In general, prequalification is helpful for early planning, while preapproval is more important once you’re ready make an offer.
How long is a prequalification letter good for?
Prequalification letters are generally valid between 30 and 90 days. After this time has passed, you will need to reapply with your updated financial information.
Because financial situations can change quickly, it is important that your prequalification letter is recent and based on accurate and current data. Changes in income, employment, or debt can make a previous estimate outdated.
What is a pre-approval letter?
Pre-approval letters provide a more verified assessment of what you can afford to borrow for a home. This estimate is based on documented, verifiable information such as pay stubs, W-2s, bank statements and a detailed credit check.
Because the financial information is supported by documentation, pre-approvals are typically more accurate than pre-qualifications. They also serve as a better indicator of which loans you qualify for. Even with pre-approval, final loan approval is not guaranteed and is subject to additional underwriting and property review.
How do pre-qualification letters and pre-approval letters differ?
“Prequalification” and “preapproval” are sometimes used interchangeably, but they are not necessarily the same. Both processes are similar in that they give home buyers an idea of what they can borrow for a home. The short answer is that pre-approval provides a more in-depth and verified estimate than pre-qualification.
Here are some of the main differences:
Verification
- Prequalification: Self-reported information that is generally not verified
- Pre-approval: Financial information is documented and verified
Accuracy
- Prequalification: Provides a general estimate
- Pre-approval: Offers a more accurate loan amount
Credit check
- Prequalification: May involve a soft or limited credit check
- Pre-approval: Requires a more detailed credit assessment
Buyer’s Intention
- Prequalification: Signals early interest
- Pre-approval: Signals stronger purchasing intent and greater financial willingness
Frequently asked questions 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 is not always the case. If so, it’s often a soft inquiry that typically won’t impact your credit score.
Does a prequalification letter guarantee you will be approved for a mortgage?
Pre-qualifying for a loan does not mean you will automatically be approved for a mortgage. The prequalification letter only provides an estimate based on self-reported information. Pre-approval provides a more accurate picture, but does not guarantee approval.
Is a prequalification letter enough to make an offer on a house?
If you want your offer to be seriously considered, you must get pre-approval. Sellers prefer pre-approvals over pre-qualification, so just being pre-qualified puts you at a disadvantage bidding war.
