Mortgage Preapprovals Vs. Prequalifications: Which Should You Get?
As you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval.” It’s essential to understand what these terms mean – they’ll guide your home search and help you focus on homes you can afford. When the time comes, they can also help you decide how much to offer and show the seller that you’re a serious buyer.
At the most basic level, prequalification and preapproval are types of mortgage approvals, and they refer to the steps a lender takes to verify that a client can afford a mortgage. In this article, we’ll review some common ways lenders use prequalification and preapproval. But first, a couple points to remember:
Every lender handles mortgage approvals differently. The steps and words involved change from lender to lender. Many lenders use prequalification and preapproval interchangeably although they’ve meant fundamentally different things traditionally.
No matter what type of mortgage approval you get, it's not a guarantee that you’ll close the loan. Prequalification or preapproval is a way for a lender to help you and a seller estimate what you can afford. After you find a house and make an offer, the home will still need to be appraised by a third party and inspected for potential repairs before you can close the loan and buy the home
What’s A Mortgage Prequalification?
A prequalification generally means that a mortgage lender collects some basic financial information from you to estimate how much house you can afford. Getting confirmation from a lender that you prequalify for a home loan allows you to have a general idea of how much you’ll be approved for when it comes time for closing.
It’s common for a prequalification to rely on self-reported information, instead of verifying by pulling your credit report or reviewing financial documents. This means being prequalified for a mortgage typically leaves you with a ballpark estimate. It also means it’s less reliable than a preapproval, which usually involves your lender checking your credit score and reviewing bank statements and other documents.
A prequalification, with realtors and sellers, typically won’t carry any weight because the numbers are not verified.
Going beyond a prequalification and getting preapproved by a loan officer is a critical step to showing you’re serious about buying a home.
YOU CANNOT AND SHOULD NOT LOOK AT HOMES UNTIL YOU HAVE A PREAPPROVAL LETTER IN HAND.
Why Is Getting Approved For A Mortgage Important?
Getting approval for your mortgage means that a lender has reviewed your financial situation and confirmed your ability to take on mortgage payments.
When you get a mortgage approval, your lender estimates how much you can afford to borrow, what your interest rate could be and how much your mortgage payments could be. You and your real estate agent can use this information to focus on homes you can afford.
A mortgage approval also proves to sellers that you can afford the home they’re selling. Without first securing approval from a lender, the seller might not trust your offer is genuine. Your offer might not be accepted – and even if it is, offering to buy a home without lender approval can slow down your mortgage loan application.