Differences Between Mortgage Prequalification Letter and Preapproval Letter

Typically, when the buyer uses financing to purchase a house, the buyer will get evidence from their lender to show the seller they do indeed qualify for that financing. This evidence will take the form of either a lender prequalification letter or a preapproval letter. The letter is given with the buyer’s offer to the seller in hopes that the seller’s acceptance of the offer is not delayed by checking the buyer’s financial status. While the prequalification and preapproval letters may sound similar, they are not. Let’s look at how these two letters differ and why a seller might insist on one over the other.

Lender Prequalification Letter

With a prequalification letter, the lender relies on information provided only from the buyer, such as income, credit score, debt and assets. A lender usually obtains this information in a telephone interview or by the buyer providing general information on the lender’s website. The lender or software then returns an estimate of how much mortgage a buyer can afford. However, a preapproval is only an estimate of what the buyer can afford, provided everything they have told the lender is true. In short, a prequalification letter won’t mean much to a seller since it relies on unverified information given by the buyer in exchange for the letter.

Lender Preapproval Letter

A preapproval letter is when the lender verifies the borrower’s information and reviews supporting documentation to determine how much they are willing to lend to that borrower. The lender’s required documents for their preapproval letter are the same as needed when applying for a mortgage. These documents include pay stubs, W-2s, federal tax returns, bank and other financial account statements, and a credit report. Because it is based on verified information, the preapproval letter is by far the better choice for the seller when analyzing the financial ability of a would-be buyer.

Note: A preapproval is not an approval or loan commitment. Preapproval does, however, speed up the loan underwriting and approval processes. Preapproval also gives the seller a reasonable assurance that the buyer can get financing and close the transaction. When choosing between similar offers, most sellers will prefer the preapproved buyer.

Prequalification is the easiest way for a buyer to estimate how much home they can afford. Preapproval is better than the prequalification estimate because it verifies the buyer’s financial information. Buyers who are serious about their house hunting should contact a qualified mortgage professional to find out how much they can afford, and so sellers will take them seriously when they make an offer.

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About Jeff Sorg

Jeff Sorg holds vocational and post-secondary school instructor licenses in several states and has authored numerous real estate continuing education and pre-licensing courses. Sorg is awarded the International Distance Education Certification Center's CDEi Designation for distance education. Memberships include ARELLO (Association of Real Estate License Law Officials), REEA (Real Estate Educators Association) the National Association of REALTORS®, Oregon Association of REALTORS®, and Portland Metro Association of REALTORS®. Awards and service include REALTOR® Emeritus; Life Member award; 2020, 2021, 2022 Chairperson of the Oregon Real Estate Forms Committee; Oregon REALTORS State Director. More on request.