This is it. You're ready to make the move into homeownership. From all the online searching you've done, you know you need to get "pre-something-ed" to prove you are a serious buyer. However, which is it: prequalified or preapproved? Both sound good, but they serve different purposes?
When you ask a Loan Officer to perform a prequalification, you can do it online, by phone, or in person. They'll ask you to share information, often verbally, on your credit, your income, assets (savings, investments, retirement accounts the amount of equity you have in any real estate you currently own); and the amount of debt you owe.
It's a conversation that helps establish some financial parameters before you start looking at and making offers on homes by helping you answer two key questions:
- What price range should I be looking in when I start my search?
- Am I ready to do this, or do I need to save more or pay down more debt?
While the process is useful, especially for first time homebuyers, it isn't rigorous enough to distinguish you from the other attendees at an open house or when you request a showing. The reason is that the letter is based off something akin to a "best guess" by the Loan Officer, it's not reviewed by an Underwriter, and doesn't address the question that matters most to sellers, Real Estate Agents, and to you: Can they/we expect to be approved for the type of mortgage needed to buy this home? To answer that, you need to be preapproved.
Preapprovals Open More Doors
The preapproval process is like a test drive before you submit your application for a mortgage. The Loan Officer and an Underwriter will verify the facts and figures you discuss, along with your credit history. This process can also help pinpoint things you might want to improve - or errors that you'll want to correct - before entering the formal application review process. Loan Officers will also begin looking for mortgage programs that might apply to your financial situation. The preapproval process is more rigorous than a prequalification and because it is fully underwritten, helps ensure your home buying process will go more smoothly.
In addition to ordering your credit report, Loan Officers may ask for copies of:
- Last year's W-2s
- Current Pay Stubs
- Brokerage and other savings account statements
- Your monthly expenses
- A current mortgage statement and homeowner's policy (if applicable)
Once you are preapproved, you'll receive a letter to share with Real Estate Agents and sellers. After you have an offer accepted on a property, you will still need to officially apply for a mortgage. That review process will involve a deeper dive into the information you've already provided, as well as into the specifics of the property itself. Fortunately, having a preapproval also means faster service and turn times to get you into your home sooner, so the official mortgage application is likely to be easier than with just a prequalification.
Why Bother Getting Prequalified?
The prequalification process takes very little time or effort on your part. Any cost is typically limited to that of ordering a credit report. When you walready have an idea of the area where you want ot look and what type of home you can afford, skipping the prequalification step can make sense. Its best use is as a preliminary step for those who need a starting point.
By comparison, for most buyers, a preapproval is a step they shouldn't skip. Having a letter from a lender that states you are preapproved can be especially helpful in neighborhoods where the existing home inventory is tight...and what the home you are looking at is perfect. Being preapproved makes it easier for the seller to accept your offer over that of a buyer that hasn't taken this extra step.