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If you're ready to get serious about your home buying journey, one of the first steps is seeing various lenders. As you become more familiar with the process, you'll likely hear the terms preapproval and prequalified mentioned again and again. We'll look at how each letter works and what you should know before approaching a home seller.

Prequalification Vs. Preapproval

The key difference between a preapproval and prequalification is that the preapproval letter is much more involved. With a prequalification, the lender will look at the general state of the buyer's assets before estimating how much home they're likely to afford. Lenders are not diving into the buyer's past, which can make real estate agents wary of accepting prequalification letters.

Preapproval

With a preapproval letter, you're typically asked to provide the following:

Two year's worth of W2s

A month's worth of paystubs

Two month's worth of bank statements

Social security card

Considering the amount of paperwork you need to provide (and the lender needs to process), preapproval letters can take months to generate. On the other hand, a prequalification letter can be procured in little more than 24 hours.

Additional Facts

Here are a few facts that can help you know more about what to expect:

Preapproval letters can cost several hundred dollars to generate. We recommend starting with your financial institution because you already have a relationship with them, and they may not charge as much.

You may be able to lock down interest rates at the time of your preapproval letter. This is exceptionally helpful for those who want to know what their payments will be down to the penny.

Make sure to calculate closing costs beforehand so you know exactly how much you'll owe out-of-pocket.

Does It Help to Have Both?

Not necessarily. Prequalification letters are generally recommended for homebuyers who may not know for sure if they're ready to buy. It's a general indication of how much money you'll get, which can help you decide if it's enough to get a preapproval letter. If you're in a buyer's market, you may be able to get away with a prequalification. However, it's generally the far less coveted letter that you can have.

A preapproval letter is definitely the best letter you can take to a seller when you're ready to make a bid on a home, but it's important to note that even these letters may fall through. For example, if a major event occurs (e.g., a job loss, etc.) between when your financial institution issued the letter and when you close on the home. Talking to a real estate agent or financial expert can make it easier to navigate it all.

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