Although the terms “preapproval” and “prequalification” seem similar enough, they meant two totally different things in the world of mortgages. Some highly unreliable sources may try to tell you that getting prequalified and/or preapproved for a mortgage loan is the same exact thing, but it’s simply not. In fact, there’s a very stark distinction between the two, and knowing what that distinction is could mean the difference between you getting a loan or not. Here’s how they differ.
Think of prequalification as your first baby step in the great big world of home ownership. When you get prequalified for a specific loan amount by a lender, it doesn’t necessarily guarantee that you will get a loan for that exact amount—or any amount, for that matter. A prequalification is a fairly superficial assessment of you as a potential buyer and doesn’t hold much power when you’re serious about making an offer on your dream home. The mortgage prequalification process is also a lot less detailed and thorough than the mortgage preapproval process is.
Typically, prequalification entails nothing more than a quick discussion with your lender about your income, credit, assets and debts. Once you’ve gone over this information with them, the lender will give you a ballpark idea of the loan amount you qualify for—without running an actual credit check. It’s a fairly quick process that can be done in person, over the phone or on the Internet. This is a great time to ask your lender about your different mortgage options and what they think would work best for you. If you want to shop around for a lender and compare rates before settling down with one, this would be the perfect opportunity to do that as well. Prequalification is the best place to start if you’re not in a particular hurry to buy a home or if you’re unsure which lender you want to stick with.
You have nothing to lose by getting prequalified, but you should aim your sights on getting preapproved right away if you already have your sights set on a specific lender and are serious about snagging that dream house ASAP.
Preapproval can be considered your rite of passage into “adolescence,” so to speak, before you become a full-fledged homeowner. This next big step is a much more in-depth evaluation of your eligibility for a home loan. At this point, you have to sit down with a lender in person and provide them with your last two income tax returns, W-2 statements, credit card statements, bank/investment account statements and pay stubs, as well as any divorce and/or child support documents. Using the information in these records, your lender will run your credit, verify your assets and income and thoroughly examine your financial background.
When they’re done, your lender will hand you a preapproval letter that states the loan amount you’re approved to receive, which acts as a tentative commitment from the lender for that specific amount. It also gives you an estimated monthly payment amount for that loan, so you’ll have a better idea of how much interest you’ll be charged. At this point you will also have a maximum price limit that you’ll have to stay under when you’re shopping around for a house. Your preapproval is good for about 45 days, so it’s important to hit the ground running and start putting in offers as soon as you have your preapproval letter in hand.
You might be wondering, “Can I make an offer on a house with just a prequalification letter?” Yes, you can, but preapproval will give you a much better edge over other buyers when you’re negotiating with a seller. Preapproval shows the seller that you mean business when you place an offer, and it’ll help save you from losing the house of your dreams to someone who is ahead of the game and has their financial affairs in order. Sellers take you a lot more seriously—and are more willing to move forward with your offer—if they see you’re financially prepared. They don’t want to run the risk of accepting your offer based on prequalification alone and then potentially running into problems when your credit is actually checked.
Sitting down with a VyStar mortgage loan officer and applying for a mortgage preapproval only takes about 15 minutes. Once you have your preapproval letter in hand, you’ll have everything you need to begin your house hunt and make an offer on the home that steals your heart.