Buyers: Preapproved or Prequalified? We Tell You Which One You Really Need
Like it or not, securing your home loan is an essential part of the home buying process – it’s even more important in a tough real estate market where lending criteria is tight and inventory is spare. When you find that home you adore, you want to be able to make an offer fast. And part of a successful offer is your money being where your mouth is.
This is where mortgage prequalification and preapproval come in. First, let’s look at what each has to offer as well as how you obtain it.
What It Is: Prequalification is the process of a mortgage lender reviewing your current financial circumstances (taking into account your income, debt, assets, etc.) and giving you an estimate of how much you can afford. The final amount you secure for your home loan may differ from this estimate, so it should be thought of as a rough guide to help you figure out your price range.
How It Is Done: You can submit a mortgage prequalification request online or over the phone. It’s generally a quick procedure since it’s not an in-depth analysis of how much your lender is going to provide for your home loan and is usually free.
What It Is: Preapproval is the process of a mortgage lender doing an in-depth analysis of your financial situation and credit rating that results in a preapproval letter that states the actual size of your home loan.
How It Is Done: You will fill out an application with a lender that delves into your income, employment status and tax forms. You may be asked to submit documents like your W-2s or 1099s for the last few years, bank statements, paystubs, or proof of your assets (stocks, bonds, mutual funds, etc.). Since this process is more intensive, there is often an application fee – be sure to ask before you apply for preapproval.
The process can take from a few days to over a week, so this is a step you should complete before you’re at the offer-making stage. When done, you’ll receive a preapproval letter that will give you an idea of the loan amount as well as the interest rate you’ll be charged at. This letter is non-binding and is good faith estimate for about 60-90 days. The letter doesn’t mean you have a loan, but if nothing major changes, you’re likely to get a loan for the amount in the letter.
So which should I do?
The advantages of preapproval are fairly obvious:
· You will have a better chance of having your offer accepted by a seller.
· You will have a good sense of how much your monthly mortgage payment will be.
· You will be able to shop around for the right kind of loan using your preapproval letter as a base.
· You will know your financial situation before making an offer, so you can be confident that your money is where your mouth is!
Prequalification might be a good step for you to do if:
· You are just beginning your home search and want to get a better idea about price range, so that you don’t waste time looking at homes you can’t actually afford.
Once you are out visiting homes, it’s a good idea to have preapproval locked in. Though there’s a fee, not getting preapproved could cost you the home of your dreams.