If you’ve been thinking about buying a home, you’ve probably heard about getting “prequalified” or “preapproved” for a mortgage. Each sounds like a good thing to do, right?
Well, there’s an enormous difference between the two—and understanding that difference can save a lot of time and potential headaches on your homeownership journey. Here’s why.
What a Prequalification Is… And Isn’t
Getting prequalified is often considered the first step to getting a mortgage. It’s essentially a quick assessment by a lender based on the financial information you provide—typically your income, assets, debts, and a soft credit check. This step gives you an initial estimate of the mortgage amount you might qualify for.
A prequalification can be completed quickly, often over the phone or online, and usually doesn’t require a fee. However, a prequalification does not guarantee you’ll get financing. It’s based on unverified information you provide. It doesn’t carry the same weight with a home seller as a preapproval, because it indicates that a lender has not thoroughly reviewed your financial background.
For this reason, a prequalification can sometimes give potential homebuyers a false sense of security. It’s possible to be prequalified for a certain amount but later find out that the actual amount you qualify for is lower due to factors that weren’t considered in the initial prequalification process.
The Power of a Preapproval
Compared to getting prequalified, a preapproval provides a much more thorough evaluation of your financial health. Unlike a prequalification, which often relies on unverified information, a preapproval requires you to provide documentation to back up your financial claims. It involves a comprehensive review where lenders examine verified documentation of your credit score, income, debts, and employment history, among other factors.
If the lender verifies that everything is in order, they will provide a preapproval letter, which is a more formal document than a prequalification letter. It states that a lender is willing to give you a loan up to a specific amount, based on the information currently available. This letter is a powerful tool when house hunting, as it shows sellers that you are a serious buyer. This can give you a competitive edge in a busy market, as sellers will be more willing to negotiate with you.
However, it’s crucial to understand that a preapproval is not an absolute guarantee that your loan will close. Changes in your financial situation, such as a significant drop in your credit score, a change in employment, or the discovery of inaccurate or incomplete information during the final loan underwriting process can impact your final loan approval. Other issues, such as the home’s appraisal falling short of the expected value, can also affect the closing.
Which Should You Choose?
Choosing between a prequalification or a preapproval depends on how serious and immediate your homebuying plans are. If you’re just starting to toy with the idea of buying a home and want a rough idea of what you might be able to afford, a prequalification can be a quick and easy way to get a ballpark figure.
However, if you are serious about purchasing a home and ready to start the house hunting process in earnest, obtaining a preapproval is the much smarter move. A preapproval shows sellers that a lender has already vetted your finances and given a thumbs up on your ability to buy a home.
If you’re leaning toward a preapproval, it’s a good idea to start organizing your financial documents early. Lenders will typically require proof of income, which could include recent pay stubs, tax returns, and W-2 forms, as well as documentation of assets like savings accounts, investments, and any other sources of income you might have. You’ll also need to provide information on outstanding debts, such as car loans, student loans, or credit card debt. Gathering these documents beforehand can streamline the preapproval process and reduce stress.
Remember, getting preapproved by a lender provides the concrete backing you need to be taken seriously in today’s competitive real estate market.
Ready to get preapproved? The loan experts at Right By You Mortgage are here to help. To get started, find a local loan officer near you or email us at inquiries@fidelitybanknc.com.
