Mortgage Prequalification vs. Preapproval: What you should know.
In a competitive real estate market (much like the current one), potential homebuyers should be fully prepared to be considered by a seller. With multiple buyers vying for the same properties, sellers are in an advantageous position to be choosy about the offers they receive.
Fortunately, there are several ways to position yourself for success when submitting an offer, even if the likely scenario of bidding against other buyers.
As I further discuss later, one of the most important things you can do ahead of time is to obtain a mortgage loan preapproval. In fact, many real estate agents in this day and age will suggest it’s not even worth your time to submit an offer without one.
Is a Prequalification the Same Thing as a Preapproval?
You might assume that a mortgage prequalification and a preapproval are simply different terms for the same thing.
However, that’s not the case. A prequalification and a preapproval are in fact different. While prequalifying and preapproval are both steps taken early in the homebuying process, they differ in the purposes they each serve.
Prequalification
A prequalification will provide you with an estimate of what you can borrow based on information you provide to a lender about your financial situation. Obtaining a prequalification is a good step to take if you’re at the very beginning of your homebuying journey and aren’t sure about how much home you can afford. Prequalifying for a mortgage helps you know where you personally stand and gives you an idea of your home price range, but it will hold little weight when making an offer.
Preapproval
A preapproval is a more thorough inquiry that usually involves providing various financial documentation and running a credit check. Based on this outcome, the lender can provide a more accurate estimate of the amount of money they’re willing to loan you and at what interest rate.
Once a lender has pre-approved you for a mortgage, you’ll get a letter you can then take to sellers. This letter shows sellers you’ve already started working with a lender, and that the lender is willing to work with you. It gives sellers peace of mind to know they won’t be wasting their time with someone who couldn’t afford their house in the first place.
Should I Get Prequalified or Preapproved?
At this point, you may be wondering if it’s best to get a prequalification, a preapproval, or both. I will further explain each option and why it may or may not make sense for you.
Prequalification Benefits
Ultimately, the need for a prequalification depends on how well you know your financial standing and how certain you are that you’ll qualify for a mortgage loan. If you anticipate buying a home but aren’t certain you would qualify for a loan, getting prequalified is a good place to start.
Understandably, you may feel apprehensive about initiating a conversation with a lender when you don’t know where you stand financially. However, you can rest assured that mortgage lenders are equipped to deal with potential homebuyers in this very situation. Even if a lender reveals that you’re not likely to be approved for a loan, this process can still provide insight as to where you stand financially and allow you to determine what steps you can take to improve your chances.
For example, perhaps you have negative marks on your credit report that need to be addressed so you can increase your credit score. Or maybe you’re in the position to qualify for a loan, but not for the amount you had hoped. This can be helpful information in determining if you should move forward with your homebuying journey at all, or if you simply need to modify your price range. Knowing where you stand can provide clarity, ease stress, and enable you to formulate a plan.
Preapproval Benefits
For individuals who are certain of their financial situation and know they’re ready to begin into the homebuying process, it makes sense to skip ahead get started on a preapproval. Completing the application process and ultimately receiving a preapproval letter will provide you with a clear budget to work with, and give you an advantage with sellers when you submit an offer.
For this, a credit check will likely be required. You should be conscientious of how many inquiries are made and during what timeline. Too many inquiries over an extended period of time could negatively impact your credit score, which could affect the interest rates offered to you.
However, when several inquiries are made in a short period of time, such as 30 days, credit bureaus will likely view them as a singular inquiry and the impact will be minimal.
How to Obtain a Prequalification
As previously mentioned, going through the mortgage prequalification process can be a great first step for certain potential homebuyers. If it makes sense for you, start a conversation with a mortgage lender to identify your parameters based on your financial situation. To process a prequalification, the lender will request general information from you, such as your household income, how much cash you have in checking and savings, your total debt balances, and your credit score.
What to Expect During the Prequalification Process
Getting prequalified is a relatively easy process that can usually be done over the phone or by filling out a form online. An estimate from the lender of how much you qualify for and what interest rates you could expect is often available in a short turnaround time. This can also a good time for you and your lender to discuss available loan options and which one might work best for you.
For a prequalification, the lender typically won’t ask for documentation of the information you provide — this is simply an estimate as to what amount of money you’re eligible to borrow. The lender is reliant on your honesty to provide you with an accurate estimate.
And while there generally isn’t an application fee for the prequalification process, many lenders do run a credit check for a prequalification.
Keep in mind that getting prequalified is not a guarantee that you will, in fact, qualify for the estimated loan amount. It is a preliminary number based on the limited information you provided, and is intended to give g you an idea of where you stand financially and a budget to work with as you begin your home search.
How to Obtain a Preapproval
Getting preapproved for a mortgage is a more involved process than getting a prequalification. If you’ll need financing for your home purchase, getting a preapproval is basically an essential before you make an offer on a home — especially in a seller’s market.
What to Expect During the Preapproval Process
Obtaining a preapproval is a formal application process that may require you to pay an application fee. Whereas the prequalification process only required you to submit information regarding income, debt, and assets, a preapproval will require supporting documentation. Documents you should be prepared to provide may include:
- Government-issued identification
- Two years of tax returns
- Recent paystubs and W-2 forms
- Two months of bank account statements
- A mortgage statement or lease agreement
- And more!
The lender collects these documents to determine your overall financial position. Your loan approval will be based on factors such as income, employment history, debt-to-income ratio, credit history, and FICO score. If you’re applying for a mortgage loan with a spouse or partner, you’ll both have to submit an application with supporting financial documents.
If you meet the lender’s criteria during the application process, they will issue a preapproval letter which usually includes the type of loan they are offering, the amount of the loan, and the terms of the loan.
It’s important to know that a preapproval letter is not a guarantee by the lender, as there are certain conditions that must be met in order for your loan application to be accepted during the underwriting process. Examples of such conditions include:
- Your financial situation does not change between the time of preapproval and underwriting (such as loss of employment)
- The property appraises below your loan amount
- Your credit score drops as a result of new debt, late payments, etc.
Although a preapproval letter isn’t a guarantee, it’s a good indicator that you’re in the best possible position to secure financing. This provides peace of mind to both you and the seller.
Lafayette Federal Is Your Trusted Homebuying Partner
Begin your homebuying journey on the right foot by securing a mortgage preapproval. At Lafayette Federal Credit Union, we want our members to begin their homebuying journey confident and well-prepared.
Our Mortgage Loan Program offers a 30-Day Close Guarantee, which provides you with $250 per day (up to $2,000) if closing goes beyond 30 days.
Additionally, Lafayette Federal is proud to offer competitive rates, loans up to $3,000,000, nationwide financing, and discounts on rates to save you money.
Get started with Lafayette Federal today.
