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What is mortgage preapproval?

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While mortgage prequalification is a first step in the home buying process, preapproval signals that you are seriously planning to buy a home. It requires more work on your end and an application fee, but it also holds more clout with sellers.

Preapproval is a lender's statement that you are actually qualified for a loan of a certain amount. Unlike prequalification, which depends solely on your word, preapproval is based on the lender's investigation of your financial history. The borrower (you) completes a formal loan application and provides the proper paperwork, and then the lender orders a credit report to verify your financial history. Eventually, you'll receive an unofficial decision on your loan application, along with information regarding different interest rates and the specific loan programs for which you qualify.

Once you are preapproved, the lender will provide you with a letter or certificate that includes your name and a dollar figure. This dollar figure is the maximum loan for which you are approved, and because the lender incorporated a credit report into its analysis and decision, the estimated loan is a much more accurate figure than was the prequalification figure.

Mortgage preapproval, however, is still not a loan commitment. A loan commitment, which a lender will only give when it is ready to lend the money, approves both you as a borrower and the house as a security instrument. Lenders do not live up to preapprovals because after the preapproval, they learn something disturbing about either the borrower or the house. Perhaps your financial situation changed or interest rates rose. Perhaps the title policy or appraisal raised questions that the bank wants resolved before it accepts the home as a security instrument.

Preapproval is thus a step beyond prequalification because the lender has verified your financial situation, but it reserves the right to back out if something unexpected occurs. Prequalification is "Hypothetically, here's what you could get," and preapproval is "Unless something unforeseen happens, here's what you will get."

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