As you prepare to apply for a mortgage, you'll come across terms you may not know like "prequalification" and "preapproval." It's essential to understand what these terms mean, as 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.
In this article, we'll go over prequalification and preapproval, and review some common ways lenders use them. We'll also explain how lenders typically handle approvals, so you can know more of what to expect when you apply for a mortgage.
Key Takeaway
The key takeaway from this article is that preapproval for a mortgage can be beneficial for both buyers and sellers. Prequalification provides an estimate of what you could afford, while preapproval verifies your credit and income to provide a more accurate estimate. Verified Approval also gives added assurance when making an offer on a home and carries more weight with the real estate agent and sellers. When it comes to deciding which type of pre-approval or prequalification to apply for, consider your individual needs and goals. With the right support, you can soon be well on your way to confidently owning your dream home!
Before you begin searching for a home, make sure you’re prepared by talking with a mortgage lender and getting preapproved. That way, you can start your home search on solid footing!
Every Lender Is Different
When it comes to mortgages, it is no surprise that not all lenders are created equal. Each lender will have different requirements and standards when it comes to prequalification and preapproval. This also means that each lender will handle their mortgage approvals differently. For example, some lenders may require a higher credit score or more assets to qualify for a loan than others. Additionally, some lenders may require additional information such as employment history or financial statements. Neither preapproval or prequalification is a guarantee that you'll close the loan, they are just a way for the lender to help you and a seller estimate what you can afford to spend.
What's a Mortgage Prequalification?
A mortgage prequalification is a process where a lender evaluates an applicant's financial information to determine if the borrower has the necessary qualifications for the loan. During this process, the lender will review an applicant’s credit report, income, and other financial documents in order to determine how much money they can qualify for. Prequalifying is important as it gives borrowers an idea of what they can afford and helps them narrow down their home search to houses within their price range. This also helps lenders assess whether or not they are comfortable taking on a loan with you. It should be noted that while prequalification may help you get approved faster or even provide you with better interest rates, it does not guarantee approval in any way.
Prequalification Letters Help You Start House Hunting
A prequalification letter is an important tool in the home buying process. This letter provides prospective home buyers with a better understanding of their budget and creditworthiness. It also gives sellers an idea of how serious a buyer is and whether they can qualify for the loan.
When you prequalify for a mortgage, lenders evaluate your credit profile, income, assets and financial obligations. The lender will then issue a letter that outlines how much they estimate you can borrow. This letter is important as it provides proof to sellers that you are serious about buying their home and have the means to do so. It also helps to provide buyers with more confidence when making an offer on a home, as they have a better idea of what they can afford.
What's a Mortgage Preapproval?
A mortgage preapproval is similar to a prequalification, but the process is more in-depth. During a preapproval, lenders review an applicant’s credit report and financial documents and make a formal decision to approve them for a loan. This is important, as it helps to give borrowers more assurance that their mortgage will be approved and provides them with the peace of mind they need to make an offer on a home. Preapprovals are also beneficial for sellers, as it shows that you are serious about buying their home and can provide proof that you have the funds to do so.
Preapproval vs Prequalification: What To Expect When You Apply
So, now that you know both prequalification and preapproval both provide borrowers with an estimate of how much they can afford, it is important to keep in mind that a preapproval is a stronger sign of your financial stability and adds more credibility to your offer than a prequalification. Lenders typically offer a few levels of approval designed to give you a clear picture of what exactly you can afford:
Prequalification
With prequalification, lenders pull your credit and ask you some questions about your income and assets. Then, they’ll estimate what you can afford. By checking your credit score, the prequalification can be more accurate than a standard prequalification that doesn’t involve this step. If you’re eligible for a mortgage, your lender will issue you a prequalification letter.
Verified Approval
Verified Approval is a more in-depth preapproval that provides potential home buyers with added assurance and confidence when making an offer on a home.
Because your lender is verifying your income and assets along with your credit history, a mortgage preapproval is a more accurate estimate of what you can afford. It also carries more weight with a real estate agent and the seller, because they’ll know your lender verified that you can afford the home you wish to buy.
Once you get approved, your lender will issue you an approval letter. You can show this to your real estate agent and the sellers as proof that you can obtain a large enough mortgage to purchase the home.
After you make an offer on a house, your full mortgage approval will depend on the home being appraised by a third party and passing any required inspections.
Which Should You Apply For?
When it comes to deciding which type of mortgage pre-approval or prequalification to apply for, it is important to consider the differences between them. Prequalification letters are more informal and just provide an estimate of what you might be able to borrow; whereas a preapproval letter is more formal and requires you to submit your financial information for a more accurate determination of your borrowing power.
If you want to increase your chances of getting the home you want, consider applying for a mortgage preapproval. This gives sellers and real estate agents confidence that you are serious about purchasing the home and have the means to do so.
Conclusion
Getting approved early on in your home search is a great way to help you narrow in on your dream house and stand out to sellers as a preapproved buyer. If you’re ready to start the pre-approval process, contact us today to get started. We can help provide you with more information on the various mortgage options available and help you determine what’s best for your situation. With the right support, you can soon be well on your way to confidently owning your dream home!
