Buying a Home: Mortgage Prequalification vs Preapproval
Buying a home can be an exciting and nerve-wracking time, especially for first-time homebuyers. There are many steps to understand and manage in the home buying process and it’s important to work with a lender you trust. Many hopeful homebuyers believe the process begins with finding the perfect house, but this approach skips two important steps that can put buyers at a disadvantage.
Before starting to house hunt, it’s crucial to contact a mortgage lender to discuss getting prequalified and preapproved for a mortgage loan. What does it mean to be prequalified and preapproved for a mortgage? Below is a look at how these two steps differ, why they’re both very important, and how they can increase your chance of getting the home of your dreams.
Getting prequalified is a relatively fast process in which a mortgage applicant provides a few financial details to a lender, and the lender uses this information to let the applicant know how much they may be able to borrow and at what terms. Prequalification is an estimate of what the lender thinks the applicant can afford. The lender takes into account factors such as income, assets, and debt. Sometimes the lender will also do a credit check. A prequalification is an approximation of buying power, and as such, is not a guarantee that a future mortgage loan will be approved.
Being prequalified can help a buyer in a few ways. It gives them an idea of how much house they can afford and what their potential monthly payment may look like. It also helps buyers compare mortgage lenders by interest rates and payment terms.
Once a buyer has decided on a mortgage lender, they can begin the preapproval process.
Getting preapproved is a more in-depth process than prequalification and involves submitting an application and consenting to a credit check and verification of finances. It lets a buyer know the specific amount they can borrow from the lender. The buyer should keep in mind that they can buy a house for less than the approved amount, but getting preapproved for a larger loan can provide greater flexibility in their home search.
What makes the preapproval process so important is that it shows a seller that a buyer is serious and likely able to obtain financing. The lender can provide a preapproval letter (usually valid for 90 days) showing that an applicant has been preapproved for a certain type of mortgage loan and a specific loan amount. Depending on the real estate market, sellers might receive several offers from multiple buyers. Having a preapproval letter increases the chances that a buyer’s offer will be selected, and making an offer on a property with a preapproval letter in hand often makes for a stronger offer. In fact, some sellers will not even consider a financed offer if the buyer is not preapproved.
After a buyer finds the house they would like to purchase and the seller has accepted their offer, the next step is to finalize the mortgage application. At this point, a loan underwriter will review the application and issue a loan commitment letter. This letter means that the application has been approved and that a closing date can be scheduled.
Buyers should keep in mind that their mortgage is not officially approved until they receive a loan commitment letter. Changes to a buyer’s financial situation during the loan application process could impact their loan application. For example, you shouldn’t apply for any new credit cards or loans during the home buying process or make any financial moves that could lower your credit score. Howcome? Mortgage lenders typically perform another credit check right before a loan closes. If a buyer had great credit when they applied for the loan but their score dropped significantly after they submitted their application, they may no longer qualify for the loan when the final credit check takes place.
It’s crucial to involve a mortgage lender at the start of your home search process. The last thing you want is to find the perfect house only to discover that you either don’t qualify for a mortgage loan or that the seller accepted another offer because you weren’t preapproved.
Getting prequalified and preapproved are smart ways to ensure that your house hunting will lead to future homeownership.