Mortgages , Home Equity

What Is The Difference Between Prequalified And Preapproved

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

It may be a lot of work to apply for and receive a mortgage in order to purchase a house. Just making sure your credit is strong enough and your down payment is sufficient may be a major hassle. Nearly a third of 2017 mortgage applications were denied by banks, reports the Urban Institute.

Phrases like “preapproval” and “prequalification” just add to the confusion. Why would you want to be preapproved or prequalified, and what do those phrases really mean?

What Exactly Is “Pre Qualified”?

During the pre qualification phase, a lender will perform a cursory analysis of your financial history. The lender evaluates the data you supply and informs you of your mortgage eligibility and the estimated loan amount.

To put it another way, becoming “prequalified” for a mortgage indicates that you have already started working with a lender.

When you prequalify, you’re only talking to potential employers in a casual setting. At this stage, the bank will depend mostly on the information you provide. Any prequalification you desire might be obtained by providing false financial information to the bank, such as an exaggerated debt-to-income ratio.

However, it would be pointless because prequalification does not ensure that you would be able to borrow the amount for which you have been approved. Even if you’re pre-qualified for a loan, it doesn’t mean you’ll definitely obtain one.

Prequalification has a time advantage since it moves quickly. Prequalification is simple and may be done over the phone or in a single visit to the bank. It’s a great way to get to know a lender before committing to long-term business with them.

Get some guidance on choosing the right mortgage plan for your needs. Lenders see pre qualification as a chance to start a conversation and create a rapport with a potential client, thus they don’t charge for it.

You don’t need a lot of paperwork or information to get started with a lender for prequalification. To get a loan, all you need to do is show up to a lender’s office with proof of your income, debts, assets, and bank account balances. At this time, no paperwork is required.

What Is “Pre Approved”?

As a follow-up to prequalification, preapproval is the final stage before final approval. To get here, you’ll need to take a more methodical approach to analyzing your financial circumstances and working with a private lender.

The process of getting a loan pre-approval from a lender is far more time-consuming and paper-intensive than getting a loan prequalification. To apply for a mortgage, you’ll need to fill out a detailed application, estimate your down payment amount, and allow the lender to conduct a thorough set of checks and balances.

Please bring the following forms of identification:

  • Pay stubs
  • Tax returns
  • W-2 forms received in the past two years
  • Documentation of any additional income, such as a contract outlining your job’s commission or bonus system, proof of alimony or child support payments, bank or investment statements containing interest or dividend income, and Social Security income.
  • Bank and brokerage statements showing your account balances
  • If your family is giving you money, a letter certifying the gift is not a loan
  • Photo ID

If you’re self-employed or operate in a sector that experiences frequent ups and downs, you may need to provide additional paperwork when applying for a mortgage. Make sure you find out from your lender exactly what paperwork it wants and provide it as much as you can. 

The sooner your lender makes a decision on your application, the better. Your lender will review your credit record and may contact you with inquiries if they see anything out of the ordinary, such as a large number of freshly created accounts or a recent bankruptcy that has yet to be removed.

If you’ve been preapproved for a loan, the lender has already determined that you’re a good bet, and they’re ready to make a loan offer. Loan pre approvals also include current interest rates, so you can get a rough estimate of how much you’ll be paying back for your loan.

Since getting preapproved involves additional work for the lender, you will likely be expected to cover any application expenses. It also has an effect on your credit, maybe lowering it by a few points.

Why Would You Want to Be Prequalified or Preapproved?

In the competitive housing market, having your loan application preapproved or prequalified puts you ahead of the competition.

Homes in desirable areas sell very rapidly, and sellers are well aware of their competitive position in strong markets. They know they can sell quickly even if they reject a few bids, so they have no incentive to accept anything less than the highest offer.

Home sellers will have more confidence in your offer if you can show them proof of prequalification or preapproval from their lender. Further, it demonstrates that you are doing the necessary preparations to get a mortgage. Because the complete borrowing process might take weeks, buyers that get a head start and are ready to close on a transaction sooner are more attractive to sellers.

Prequalification and preapproval are helpful even in more sedate real estate markets.
A prequalification letter from a lender gives you an idea of how much money you might be able to borrow from that institution. That way, you can pick and choose which houses to check out, and you’ll know right away if any of them are out of your price range.

A preapproval letter specifies an interest rate and a maximum loan amount. That data will let you decide with certainty whether or not you can afford a house. Monthly payments may be estimated depending on the total borrowed, providing you more control over your cash flow.

Beginning the mortgage application process with either prequalification or preapproval is a good idea. Taking the preliminary steps toward obtaining a mortgage loan is a good idea if you want to purchase a home soon since it will save you time later.

Is it guaranteed that you will get a loan if you are preapproved or prequalified?

Even if you’ve been prequalified or preapproved for a loan, it doesn’t mean you’ll really obtain one. Prequalification for a loan is not a reliable indicator of success. Since the prequalification procedure is so casual, banks will typically take a borrower at his or her word when it comes to discussing their financial situation.

A lender may decide not to grant you a loan after reviewing your application, income, and expenses, even though you’ve been preapproved or prequalified.

Lenders put in a lot more work for preapproval than for prequalification, thus it carries more weight. Although a pre-approval includes the maximum loan amount and interest rate, making it functionally equivalent to an offer, the lender will still want to verify a few items before signing the dotted line.

You’ve found the house of your dreams and negotiated a price with the seller; now it’s time for your lender to complete its due diligence by, for example, commissioning an appraisal of the property.

A mortgage lender is de facto the owner of your home while you are still obligated to make mortgage payments. Lenders typically prefer to see evidence of fair market value before advancing funds. Your loan application might be rejected even if you make an offer that is significantly more than the property’s fair market value.

Your loan closing conditions will be determined by the findings of the bank’s appraiser. If you suspect that there is an issue with the building’s foundation or anything else that might compromise the safety or value of the property, you may want to engage a professional to do an inspection. You may be able to get the seller to foot the bill for the inspection and appraisal if you bargain hard enough.

Assuming you’ve done all possible to appease your lender, they’ll do one last check of your credit and finances before approving your loan. Between the preapproval and the offer on the house, the bank wants to check to make sure you haven’t taken out any huge loans or spent all your money on gambling. If the paperwork and inspections are in order, the loan will be approved and you will be a proud homeowner.

Bottom Line

It’s important to be prequalified or preapproved for a mortgage before shopping for a property, but doing so may be time-consuming and difficult. Have a budget in mind and the documents your lender might need ready before you apply.

Preparation is the key to a successful house hunting trip, as it will allow you to focus on houses within your price range.

You may get a better idea of how much you can afford to spend on a mortgage by becoming prequalified and preapproved, which will help you make room in your new budget for the expenses you’ll incur now that you own a home instead of renting.

Curated posts

Someone from San Antonio, TX just viewed Best Car Insurance In Alaska