Purchasing a home is a big financial decision for anyone. Not all buyers have the means to pay their dream homes in cold cash hence more people turn into mortgages. You probably have heard about pre-approvals and pre-qualifications for a mortgage. But do you know the difference? Understanding these two key steps in the mortgage application process can help you focus on homes you can afford. Every lender is different and recognizing the details of being preapproved versus prequalified can aid you as a homebuyer.
What is mortgage prequalification?
An important early step in your homebuying journey is a prequalification. Prequalification mainly means that a mortgage lender collects some basic financial information from you to estimate how much you can afford for a house. It is an amount that is based only on the information you provided to the creditor. The creditor won’t take a deeper look at your financial situation and history. They will just provide a ballpark estimate of how much you can borrow based on the data you gave. Since this was based on a self-reported information, it doesn’t verify your credit score, income, or money in the banks. Moreover, this won’t carry as much weight as compared to you being preapproved.
After you’ve been prequalified, you will receive a letter that you can show to an agent or seller as proof that you’re working with a creditor.
Prequalification is also a good time to learn about different mortgage options and work with your lender to identify which would be a right fit for your needs.
What is mortgage preapproval?
After you have been prequalified for a mortgage, your next step is to get preapproved. As a borrower, you must complete an official mortgage application and supply the lender with all the pertinent documentation to perform an extensive credit and financial background. Before you get preapproved, the lender may review your tax returns, income, assets, bank statements, and credit. Preapproval is more accurate than prequalification and is accepted by home sellers. This process may take days before a decision is released. When you are preapproved, you will receive a verified approval letter that is good for 90 days. This letter tells home sellers that you, as the buyer, can purchase and finance the home you are trying to acquire.
Preapproval can be the first step to securing a loan approval letter for a mortgage. By getting preapproved, you gain a competitive advantage and make an offer with confidence. Remember that preapprovals are estimates to help guide your home search. A full mortgage approval will depend on the home being appraised after you make an offer on a house.
Sellers prefer preapproved buyers as this say they are serious in purchasing their homes. The preapproval can give you a more accurate estimate of how much you can afford, the types of interest rates you can expect to pay on your loan, and which types of mortgages you will qualify for. If you are just starting to look at properties and not yet completely sure you are ready to buy, a prequalification can be a good option for you.