If you’ve been mortgage shopping in the Roanoke Valley, you’ve probably run into the terms “prequalified” and “preapproved.” It’s not always clear what the difference is, and to make matters more confusing, lenders sometimes use them in different ways depending on their own processes.
In general, there are some important distinctions between being prequalified for a mortgage and being preapproved. When you’re ready to start looking at homes — and especially when you’re ready to make an offer — it’s critical to understand the difference.
Potential homebuyers can usually be prequalified quickly, often online or over the phone. You’re basically giving the lender a broad sense of your finances, including information about your income, assets and debt. At this point, you’re not applying for a mortgage, and the lender likely isn’t even looking at your credit report. You’re just submitting some preliminary information to get the ball rolling. The lender will come back with an estimate of what you can afford and how much you might be eligible to borrow.
Prequalification is a great first step in the homebuying process, especially for first-time homebuyers. It gives you a better sense of your price range so you can narrow your home search. It also gives you a chance to look at different mortgage options and get to know a lender.
The important thing to understand, though, is that the lenders make no promises when you’re prequalified. They’re simply saying that based on the unverified preliminary information you’ve given them, you would be a candidate for a mortgage of a certain amount.
Preapproval involves a more formal review of your finances. You’ll complete a thorough application and be required to provide documentation of income, cash flow, assets and debts. The lender will run a credit check and verify your employment and other financial information. Because this process is more in-depth than prequalification, some lenders will require a fee for mortgage preapproval. [Realtor.com has more about the paperwork you’ll need to get this process rolling.]
When your preapproval is complete, your lender will issue a letter stating how much the institution is willing to loan you to buy a home. It might not sound much different from prequalification, but remember: The lender has actually been through your finances line by line and confirmed everything you’ve claimed. If you’re bidding against another buyer, having a preapproval in hand is going to give you a leg up if all else is equal.
Still, even though the preapproval is a commitment from the lender, it is not a guarantee that your mortgage will be approved on a particular home. Once you put a contract on a house, the mortgage lender will require several other things, including an appraisal, various inspections and a title search to look for outstanding liens against the property. You’ll also need to pass a final financial verification to make sure nothing has changed since you first applied that would make you ineligible for the loan. Only after all those items come back clear will the lender approve your loan and fund your purchase.
Let’s talk about whether you’re prequalified or preapproved and get you connected with a mortgage professional who can guide you through the process as we start looking for your new home. Contact me to talk about your next new home: (540) 330-6906 or firstname.lastname@example.org. Check out my listings right here and like my Facebook page.