First time home-buyers are often under the impression that mortgage prequalification and preapproval are interchangeable terms, but they are actually two separate steps in the financial process and it is important to understand the difference between them.

Prequalification is a lender’s estimate of how much you could be eligible to borrow based on information you supply. In a prequalification, a credit report is not pulled, which means that the lender is depending on incomplete (and sometimes inaccurate) information. Prequalification does not mean a loan will be given, but is meant to serve only as an estimate for the mortgage process. Prequalifications help sellers determine a potential buyer’s general creditworthiness and give buyers a better understanding of their future financial responsibilities, but are not binding in any way.

Preapproval, however, is more concrete and does involve a credit report check. Lenders will contact employer, banks and others to verify a potential loan recipient’s income, assets, debts and credit history in this step. A preapproval from a lender will say how much you are eligible for, how long the approval is valid, and may contain some additional conditions for the loan. Note that a lender may not require the payment of any fees, except the cost of a credit report, at the time of a preapproval. Just because one obtains a preapproval does not mean that the loan is final – the funding will only be given when the property appraisal, title search, and other verifications have been confirmed.

There is no harm in getting prequalified, but to seal the deal preapproval is necessary. Buying a home is a complex process – make sure you know the industry lingo before getting involved in buying and selling negotiations to ensure that all parties are on the same page.