Good afternoon Patti,
The ONLY difference between Prequalification and Preapproval is the spelling. The fact is, according to HUD Guidelines, we Lenders are not supposed to "Preapprove" anyone! It's just semantics and marketing hype.
I have seen many real estate agents here on Trulia and elsewhere write the difference is that we Loan Officers only run a credit report for Prequalification but we look at all the Income and Asset docs along with the credit report on the Preapproval. More nonsense hyped by BAD Loan Officers.
When you are starting out to become a homeowner you want to get Prequalfied by a Licensed Mortgage Loan Originator (MLO) with at least 15 years experience in the trade. You can verify the License of any MLO at http://www.nmlsconsumeraccess.org/
An experienced Mortgage Loan Originator (Loan Officer) will take the time to review Income, Assets and Credit documentation in detail with a prospective Borrower. As you begin your journey towards homeownership, you'll want to sit down with a Loan Officer who does that. Anyone who only runs a credit report and does a telephone interview about your income and assets without reviewing documents is wasting your time.
In the "Final Approval" for a mortgage loan:
1. You'll have identified a property to buy and signed a purchase agreement/contract of sale
2. You'll have made a formal Loan Application to your Lender for the loan
3. Your Lender verifies your Employment, Income, Assets, Credit, Appraisal value of the home you are purchasing and title report.
4. Based on the acceptability of all those criteria by the Lender's Underwriter according to accepted Underwriting Guidelines to approve mortgage loans, the Lender Approves your loan and issues a written "Commitment To Lend." That's the Real McCoy; the "final approval" if you will.
So you can see when a Loan Officer reviews Income and Asset documentation up front at the Prequalification stage, the experienced mortgage professional that she is can best assess your chances of a loan approval. And, at the end of the day, that's what a Prequalification truly is: an assessment of your chances of getting approved for the loan. The more experienced the mortgage professional, the better your chances.