Prequalification vs. Preapproval, which one is best for you?
When it comes to mortgages, you might wonder if pre-qualified and preapproved are the same thing. While they are alike in many ways, they are actually two different parts of the home buying process.
Let’s look at mortgage prequalification vs. preapproval, what each one does, and which is best for your situation.
What is prequalification?
Prequalification for a mortgage comes first and is typically a quicker process compared to mortgage preapproval.
Mortgage prequalification is a basic estimate from a mortgage lender of how much they might lend you to buy a home.
With prequalification, your mortgage lender needs only basic information about your financial situation and home buying goals.
Mortgage prequalification requires a soft pull of your credit report. A soft pull doesn’t impact your credit report or credit rating. This helps lenders evaluate your creditworthiness and determine whether you will meet mortgage eligibility requirements.
Most lenders let you know the outcome of your prequalification process over the phone rather than send you a mortgage prequalification letter.
You can think of mortgage prequalification as a lender saying you can apply for a mortgage with them—that you meet their basic mortgage requirements.Check your mortgage options
What is preapproval?
Mortgage preapproval is a more rigorous process than mortgage prequalification.
To be preapproved for a mortgage, your lender will evaluate your financial situation in greater detail than prequalification and perform a hard inquiry on your credit report.
Pro tip: If you’re contacting several mortgage lenders about preapproval, do it within a 45-day timeframe. All mortgage-related hard pulls on your credit report done within that timeframe are counted as a single inquiry and won’t negatively impact your credit rating.
Once the application process is complete, your mortgage lender will give you an official loan offer, usually in the form of a mortgage preapproval letter.
Mortgage preapproval is crucial for determining how much money you can borrow from a lender, the mortgage rate you qualify for, and the terms of your mortgage.
Mortgage preapproval also “locks in” these details, usually for up to 90 days.
In other words, you get the interest rate quoted on your preapproval letter regardless of what the market rates are doing—and that can save you thousands of dollars over the lifetime of your mortgage.
Another major benefit to having a mortgage preapproval letter is that it lets sellers know you’re financially capable of completing the purchase. Many sellers will not accept an offer to buy a home unless it is accompanied by a mortgage preapproval letter.
Can I make an offer with a prequalification letter?
While you can always include information about your prequalification with your offer, it typically doesn’t hold as much weight as a preapproval letter.
This is because prequalification doesn’t assess your finances as carefully as the preapproval process, and a lender isn’t offering you the money to buy a home.
Sellers want to see that you’re approved for financing so the deal won’t fall through when it comes to it.
Does prequalification mean approval?
Both mortgage prequalification and preapproval simply provide insight into how much you can borrow. Prequalification doesn’t mean you’ve been approved for a mortgage; it does, however, mean you’ve cleared the first step toward homeownership.
Once you find a home you’re ready to buy, you must apply for a mortgage loan officially. You’ll then get an official loan commitment from the lender.
Which is better, prequalification or preapproval?
Where you are in your home buying journey will determine if prequalification or preapproval better suits your situation.
If you’re unsure whether you are financially prepared for homeownership, mortgage prequalification is a great place to start. With it, you’ll get a better idea of how much you could borrow and ideas about loan terms.
But if you’re ready to buy a home, you’ll want to get preapproved.
Preapproval offers a more detailed mortgage estimate, secures your mortgage rate, and can help you make a successful offer to buy.
Mortgage preapproval is also a great advantage in a competitive market.
With mortgage preapproval, you won’t anxiously wait while your application is processed, hoping someone else doesn’t buy your house.
If you already have your mortgage preapproval letter before you begin house hunting, you can make an offer immediately when you see your dream home.
What do I need to get preapproved?
Mortgage preapproval essentially means that you apply for a mortgage before you need the money. To get preapproved for a mortgage, borrowers must complete an application.
You’ll also need to provide proof of income and employment information, credit score, and supporting documentation.
Start with a credit check
Because mortgage preapproval depends on a borrower’s creditworthiness, your credit score and credit history play a starring role in determining your eligibility. That’s why it’s always a good idea to start by getting a free copy of your credit report.
If you notice any mistakes, you can reach out to the reporting agency to correct any errors. Once corrected, you’ll receive an updated copy of your credit report.
Gather supporting documentation
You’ll need to provide documentation supporting your financial information. Most lenders look for tax returns, W2 forms, or pay stubs, although you may be asked for additional documents such as bank statements, alimony, or child support orders.
Contact mortgage lenders
Get in touch with a few mortgage lenders before applying for mortgage preapproval.
Comparing lenders can help you decide who you want to work with. Some lenders offer additional services, free of charge, to help you reach your home buying goals.
At AAA Banking, our HomeScout program not only helps borrowers find the home of their dreams but also helps streamline the home buying process.Start your homebuying process
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If a new home is in your future, reach out to AAA Banking today.
We’re ready to walk you through the borrowing options available and help you find the right financing solution to help you make your dream home your new home.
Photo by Michael Tuszynski