a couple sit in the kitchen of a show home and discuss some figures with the estate agent or mortgage advisor

To reduce the impact on your credit score, you should shop around for a lender before moving forward with the preapproval process. (Getty Images)

Before you can buy a house, you have to know how you’ll pay for it. For 88 percent of homebuyers, that means financing the purchase with a loan, according to the National Association of Realtors' 2018 Home Buyer and Seller Generational Trends Report.

A major part of finding the right lender and knowing what you can afford is providing information to the bank, credit union or other lender to prove you can continue to pay back the loan, with interest, over time.

[Find out more about The Best Mortgage Lenders of 2018.]

There are two options to find out what a bank is willing to lend you, as long as everything checks out once you’ve picked a house: prequalification and preapproval.

Prequalification. Having a prequalification letter from a lender means you’re conditionally approved to purchase a home up to a certain price, based on basic information about your income, debt and how much you have saved for a down payment.

While prequalification doesn’t require the documentation and proof of funds needed for a preapproval, it’s particularly helpful for homebuyers who have no idea about their budget for a home. “Prequalification gets them in a position to shop,” says John Pataky, executive vice president at TIAA Bank.

Preapproval. With preapproval, you’re providing the details about your employment and financial information and letting the lender pull your credit history to learn more about you as a borrower. A preapproval means the lender is stating confidence in lending you a certain amount of money to purchase a home, pending any issues with the house itself or unforeseen circumstances with your finances.

While the differences between preapproval and prequalification are merely a matter of reporting financial information versus providing documentation for it, a preapproval letter can be far more powerful when it comes time to place an offer on a home. That's because with preapproval, the seller has proof of your lender's confidence in you as a borrower. While prequalification makes it easier to shop for a home you can more realistically afford, preapproval gives you the strength to negotiate a purchase price, Pataky says.

Brian Simmons, founder and CEO of Ask a Lender, an online platform to help consumers shop lenders and loans and get financial advice, echoes the preference for preapproval: “One of the first things a buyer should do when they begin looking at homes is getting preapproved for a mortgage.”

If your local housing market is seeing frequent bidding wars and multiple offers on houses, a preapproval could help keep you from being overlooked by sellers who have many options to choose from when it comes to sale terms and price. Still, there are times when prequalification may be your best option to begin house hunting.

Here are five things to keep in mind as you decide whether prequalification or preapproval is the best move for you.

To shop lenders, prequalify. You may not have decided on the lender you’d like to work with yet, and shopping around by inquiring with three lenders or so is always recommended. Rather than just talking to a loan officer about available programs, you can use the prequalification process to gauge how much a lender would be able to lend to you. Of course, don’t base your choice of lender solely on the maximum price you prequalify for. Also consider what terms, rates and other details will best suit you in the long run.

[Read: The Guide for First-Time Homebuyers.]

Don’t get preapproved by too many lenders. Preapproval includes a full review of your financial background, including your credit history. As a result, that inquiry is noted in your credit report and can negatively impact your credit score if you have too many recent checks into your credit history.

“It doesn’t necessarily reflect well on you,” Pataky says. If you’re unsure which lender you want to work with, ask more questions and consider trying out prequalification first, then apply for preapproval once you’ve made your decision.

Neither guarantees a rate lock. The interest rate on your mortgage may be a deciding factor in whether you can afford a certain house. But your ability to secure a desirable interest rate through a rate lock, which guarantees your rate will not increase over a set time period – typically between 30 and 90 days – often only happens when you’ve found the house you want to buy.

Rate locks vary based on lender practices, but prequalification rarely offers a rate lock, and preapproval often doesn’t include a rate lock until you’ve identified the house you wish to purchase – or even until the seller has accepted your offer.

Ask your lender what’s required to ensure a rate lock and how long that rate lock lasts. In many cases, the lock is limited to 30 days, which is just enough time to get through the contract period on a house.



Preapproval still isn’t a done deal. Even if your lender is impressed by your salary and pristine history of paying off debt, no preapproval is a guarantee that a mortgage will be approved once you’ve found the house you want. There are still other factors at play, the first of which focuses on whether your financial situation has changed.

“The factors by which you were preapproved have to be maintained,” Pataky says. That means not quitting your job, not buying a Maserati to keep up with the Joneses in your new neighborhood and not opening up five credit cards in the last two weeks, he explains.

Another factor standing between you and mortgage approval is the house’s condition and appraised value. Even if you’re preapproved to buy a house for $400,000 and agree to that same price with the seller, if the house appraised for only $375,000, your lender will likely only approve you for a mortgage on the house at $375,000. You’re then tasked with trying to renegotiate on price with the seller, coming up with the extra cash on your own or starting your search for a home all over again.

Keep asking your lender questions. Even if you’ve bought a home with a mortgage before, it’s likely been at least a few years, and the process will feel different. At every step of the way, you shouldn’t be afraid to ask your lender about expectations, timing and documents you should have ready to help streamline the process as much as possible.

“During the preapproval process, the buyer will need to provide some of the documentation their loan officer will use when it’s time to underwrite the loan,” Simmons says. “This is a good opportunity to ask the lender questions about the process and get a checklist of documents the lender will need, such as pay stubs, bank statements and tax documents.”

[Read: The Guide to Making and Accepting an Offer on a Home.]

The fact that you’re already looking to better understand the process and make the right move puts you at an advantage in the homebuying process. “Typically we find out that the consumer who seeks the education, the knowledge and the discipline to go through a relatively qualitative process … they’re fairly responsible,” Pataky says.

Tags: real estate, housing, housing market, home prices, mortgages, new home sales, existing home sales, pending home sales


Devon Thorsby is the Real Estate editor at U.S. News & World Report, where she writes consumer-focused articles about the homebuying and selling process, home improvement, tenant rights and the state of the housing market.

She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.

Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at dthorsby@usnews.com.

Recommended Articles

The Guide to Living in a Co-Op

Devon Thorsby | July 9, 2020

Here's what you need to know about how a co-op works differently from traditional homeownership.

What to Do if You Get Evicted

Maryalene LaPonsie | July 8, 2020

With government protections being lifted, many people could face eviction notices in the months to come.

How to Find a Real Estate Agent

Devon Thorsby | June 30, 2020

Here's how to find a real estate agent to help you confidently navigate a home sale or purchase.

Should You Buy a Condo?

Geoff Williams | June 26, 2020

Before you commit to owning a home, consider factors like maintenance fees and proximity to neighbors.

What to Know About Moving to Canada

Devon Thorsby | June 25, 2020

Planning and preparation can make your move to Canada a success.

The Guide to Buying a Home Sight Unseen

Dima Williams | June 24, 2020

While feasible, purchasing a home sight unseen requires more work and attention.

How to Look Up the History of Your House

Devon Thorsby | June 23, 2020

Find out anything from previous owners and environmental records to who died on a property.

Is My Agent Selling My Home Right?

Steven Gottlieb | June 19, 2020

A few questions can help you know if your real estate agent has the skills to sell your home at the right price.

Prepare Your Home for a Hurricane

Kimberly Lankford | June 19, 2020

Hurricane season runs from June through November, and even some small steps can make a big difference in protecting your home.

What to Know About Moving to Austin

Devon Thorsby | June 18, 2020

Find out if you should be one of the many people putting down roots in Austin, Texas.

How to Renovate a House

Devon Thorsby | June 17, 2020

Plan your home remodeling project carefully, and consider your skill level combined with your budget.

How Much Does a Tiny Home Cost?

Devon Thorsby | June 16, 2020

Living in a tiny house may sound like a great way to save, but some details require a hefty investment.

How to Prepare for a Long-Distance Move

Lisa Larson | June 12, 2020

Follow these 10 tips for getting your family and home ready to relocate to a new city or state.

Neighbor Rights Regarding Construction

Devon Thorsby | June 11, 2020

Construction noise can be a nuisance for homeowners and apartment dwellers, so it's important to know your options.

Do's and Don'ts of Buying Vacant Land

Devon Thorsby | June 9, 2020

Buying a home can be complicated, but purchasing land to build on is a whole new ball game.

15 Affordable DIY Backyard Games

Devon Thorsby | June 4, 2020

These at-home projects will get you and your crew outdoors this summer to make the most of your backyard space.

25 Affordable Home Organization Ideas

Devon Thorsby | June 2, 2020

These tips will bring order to your home – and keep it that way.

Outlook for the Housing Market in the Recession

Devon Thorsby | May 28, 2020

Are we in a recession? Here's a look at how the pandemic will affect the housing market.

What to Know Before Moving to Miami

Devon Thorsby | May 26, 2020

Beyond the sunny weather and beaches, Miami offers residents global business opportunities and multicultural attractions.

Should You Move to Florida?

Devon Thorsby | May 21, 2020

Whether you're aiming for South Beach or the Panhandle, there are a few things you should know before making Florida your new home.