Before you begin looking at homes, you’ll want to learn about the importance of prequalification and preapproval and the differences between them.
Both prequalification and preapproval can give you an idea of how much home you can afford. There is less of a barrier for prequalification, while preapproval is a more in-depth process.
What does it mean to be prequalified for a loan?
A mortgage loan prequalification is an estimate of how much a lender would be willing to loan you. To be prequalified, you would typically be asked to provide:
• Social Security Number
The lender would provide you with a written statement showing your maximum loan amount based on your debt-to-income ratio. Prequalification is helpful in helping you figure out if buying a home is a viable option and what your price range might be.
What does it mean to be preapproved for a loan?
A mortgage loan preapproval means you have a tentative commitment from a specific lender for mortgage funding. To be preapproved, you will:
• Complete a mortgage application
• Run a credit check
• Supply necessary documentation on financial background (proof of employment, income, assets, debts)
From this information, the lender will be able to tell you a specific mortgage amount that you are approved for. You will also have an idea of the interest rate you will be charged on the loan. Then, you can begin looking at homes in this price range or below.
The difference between prequalification and preapproval is that prequalification is only a preliminary decision, and not a full approval.
Is preapproval better? Sue, a real estate agent, explains one of the benefits of preapproval: “It’s much better for negotiating, because if you’re preapproved, that seller knows that your bank has reviewed your credit and all your documents, and you’re preapproved for the loan.”
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JA YUNG: Prequalification is when you are submitting your income, asset information and maybe getting your credit report pulled, and it’s an initial preliminary decision of what you may be eligible for, but it is not a full underwriting approval.
JA YUNG: Now preapproval is when we actually collect the documents for your income and assets and verify all of that information, and we have an actual underwriter who understands all of the agency guidelines and requirements for the financing of the loan and they’ll verify and confirm that all is well.
TAMARA: We’re going to pull your credit report, and we’re going to look at your credit to see like what type of obligations you already have. So if you have a car payment, we have to take that into account. If you have a lot of credit cards or student loans, we’re going to take those into account as well.
ROSARIO: So preapproval is basically a verified prequalification. We review your income, assets and determine what you could actually afford. At that point in time you would be ready to proceed with purchasing a property.
SUE: It’s much better, and it’s much better for negotiating, because if you’re preapproved, that seller knows that your bank has reviewed your credit and all of your documents, and you are approved for the loan.
ADAM: Yeah. I mean, I think it’s definitely important to have that preapproval. One, it kind of solidifies how much home you can afford; and then two; it shows that perspective seller that this person is making a serious offer. So, yeah, having that ahead of time, we knew that we were preapproved, but not having that letter could slow down; and we were in a situation with multiple bids, and it could have lost us the home potentially if someone else had that letter and we didn’t have that letter.