What does it mean to be prequalified or preapproved for a mortgage? One lets a future homebuyer dream, and the other adds reality to the dream.
Here’s a look at how these two steps vary, how each can play a part in a home-buying strategy, and how one in particular can increase the chances of having a purchase offer accepted.
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What Does Prequalified Mean?
Getting prequalified by phone or online usually takes just minutes.
You provide a few financial details to mortgage lenders. The lenders use this unverified information, usually along with a soft credit inquiry, which does not affect your credit scores, to let you know how much you may be able to borrow and at what interest rate.
Getting prequalified can give homebuyers a general idea of loan programs, the amount they may be eligible for, and what monthly payments might look like, the way a home affordability calculator provides an estimate based on a few factors.
You might want to get prequalified with several lenders to compare monthly payments and interest rates, which vary by mortgage term. But because the information provided has not been verified, there’s no guarantee that the mortgage or the amount will be approved.
What Does It Mean to Be Preapproved?
Everyone talks about what direction the housing market is taking, but the reality is that millions of Americans buy homes in any given year. They brush up on types of mortgage loans, and many face the probe known as mortgage preapproval.
Preapproval requires an investigation of your income sources, debts, employment history, assets, and credit history.
Verification of this information, along with a hard credit pull from all three credit bureaus, which may cause a small, temporary reduction in your credit scores, allows the lender to conditionally preapprove a mortgage before you shop for homes.
A preapproval letter from a lender stating that you qualify for a loan of a specific amount can be useful or essential in a competitive real estate market.
When sellers are getting multiple offers, some will disregard a purchase offer if it isn’t accompanied by a preapproval letter.
When seeking preapproval, besides filling out an application, you will likely be asked to submit the following to a lender for verification:
• Social Security number and card
• Photo ID
• Recent pay stubs
• Tax returns, including W-2 statements, for the past two years
• Two to three months’ worth of documentation for checking and savings accounts
• Recent investment account statements
• List of fixed debts
• Residential addresses from the past two years
• Down payment amount and a gift letter, if applicable
The lender may require backup documentation for certain types of income. Freelancers may be asked to provide 1099 forms, a profit and loss statement, a client list, or work contracts. Rental property owners may be asked to show lease agreements.
You should be ready to explain any negative information that might show up in a credit check. To avoid surprises, you might want to order free credit reports from www.annualcreditreport.com. A credit report shows all balances, payments, and derogatory information but does not give credit scores.
Knowing your scores is also helpful. There are a few ways to check your credit scores without paying.
Those who have filed for bankruptcy may have to show documentation that it has been discharged.
Calculate Your Potential Mortgage
Use the following mortgage calculator to get an idea of what your monthly mortgage payment would look like.
Do Preapproval and Prequalification Affect Credit Scores?
Once you decide on a mortgage lender or lenders, you can begin the preapproval process.
Only preapproval requires a hard credit inquiry, but the good news for mortgage shoppers is that multiple hard pulls are typically counted as a single inquiry as long as they’re made within the same 14 to 45 days.
Newer versions of FICO® allow a 45-day window for rate shoppers to enjoy the single-inquiry advantage; older versions of FICO and VantageScore 3.0 narrow the time to 14 days.
You might want to ask each lender you apply with which credit scoring model they use.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Do I Have to Spend How Much I’m Preapproved for?
No! The preapproval amount is your maximum house-hunting budget. Staying well under that number can’t hurt and might free up money for more than mortgage payments.
Like what? Like a college fund, retirement, and vacations.
And like — groan — emergency home repairs.
Recommended: Guide to First-Time Home Buying
Are Prequalification and Preapproval the Same Thing?
By now you know that they are not one and the same. Here’s a visual on what’s needed for each:
|Info about income||Recent pay stubs|
|Basic bank account information||Bank account numbers and/or recent bank statements|
|Down payment amount||Down payment amount and desired mortgage amount|
|No tax information needed||Tax returns and W-2s for past two years|
Do I Need a Prequalification Letter to Buy a House?
No. Nor do you have to have a preapproval letter when making an offer on a house.
But getting prequalified can allow you to quickly get a ballpark figure on a mortgage amount and an interest rate you qualify for, and preapproval has at least three selling points:
1. Preapproval lets you know the specific amount you are qualified to borrow from a particular lender.
2. Going through preapproval before house hunting could take some stress out of the loan process by easing the mortgage underwriting step. Underwriting, the final say on mortgage approval or disapproval, comes after you’ve been preapproved, found a house you love and agreed on a price, and applied for the mortgage.
3. Being preapproved for a loan helps to show sellers that you’re a vetted buyer.
Prequalified vs. preapproved: If you’re serious about buying a house, do you know the difference? Getting prequalified and then preapproved may increase the odds that your house hunt will lead to a set of jangling keys.
SoFi offers a range of fixed rate mortgage loans with competitive rates and low down payment options.
Looking at investment properties? SoFi has loans for those, too.
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
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