If you are looking to buy your first home, chances are you have heard terms like “prequalification” and “preapproval,” but what do these terms really mean? What is the difference between prequalified and preapproved and what does it mean when you are shopping for your new home?
Here we take a closer look at each term, and how choosing to get prequalified or preapproved can make your home buying process easier.
Pre-qualified vs. Pre-approved mortgage
Prequalification and preapproval are both types of mortgage approvals offered by lenders that help you determine how much home you can afford. While both options are similar, there are some distinct differences that you need to know about as they can make a difference in your home search.
A prequalification mortgage is often the first step in a homebuyer’s journey. With a prequalification, a lender can give you an estimate of the amount you may be able to borrow based on the financial information you provide. This amount is determined by the evaluation of self-reported financial information and does not include a credit check.
A mortgage pre-approval is the closest you can get to a full mortgage without actually purchasing a property. In order to apply for preapproval, you will need to complete a mortgage application and provide income and finance information. The lender will verify income and run a credit check. While a prequalification gives you an estimate of what you might qualify for, a preapproval is an offer for a specific amount that is good for 90 days.
|Prequalified Mortgage||Pre-approved Mortgage|
|Provides an estimate of how much home you may qualify for||Provides an actual offer good for 90 days|
|Does not require a credit check||Requires credit check|
|Must provide income information||In addition to providing income information, you must provide pay stubs, bank account information, and w-2 statements, as well as any other necessary information.|
|Can be done for free over the phone||Requires a mortgage application to be filled out and paperwork submitted|
|Doesn’t hold much weight in the buying process||Speeds up buying process as you are already approved and ready to purchase|
|Does not expire||Good for 90 days|
How long does prequalification or preapproval take?
The time required to process a prequalification or preapproval can vary by lender. In general, prequalification is a simple and quick process that can often be done online or over the phone. You simply provide the lender with your financial information and they do a quick analysis to determine an estimate of what you can afford. After this analysis, the lender will provide you with a pre-qualification letter within a day or two.
The pre-approval process, however, takes a little longer. The borrower must complete a mortgage application and provide the lender with all the necessary paperwork to verify income and assets. In addition, the lender will conduct a thorough credit and financial background check. Once completed, the lender will provide a pre-approval offer for a specific amount at a specific interest rate.
What information do I need to provide?
What information you need to provide will depend on whether you are looking for prequalification or preapproval. For pre-qualification, you will only need to provide verbal information on your income, banking, and credit history without any required paperwork. For a preapproval, you will need to provide all that information and then have the paperwork to back it up. This includes pay stubs, bank statements, w-2 statements, tax returns, and whatever else the lender may require.
Which option is best for me?
Which option is best for you depends on your situation. If you are not in a hurry to purchase and simply want to have an idea of what you may qualify for, then a prequalification is all you need. However, if you are in a competitive housing market and looking to buy your home soon, a preapproval will help you stand out among other potential buyers and show the sellers that you are committed and qualified for the purchase of the home.
Frequently Asked Questions
Is it better to be pre-approved or pre-qualified?
If you are simply looking to get an idea of what you can qualify for, then a prequalification is probably all you need. However, if you are ready to buy a home or live in an area with a competitive housing market, a preapproval will give you an edge over other potential buyers and can help speed up the buying process.
Does prequalification mean you will be approved?
Prequalification is not a guarantee that you will be approved for a loan. It is simply an estimate of what you can afford based on the financial information you provided. In order to receive approval, you will need to follow all the steps for a mortgage application.
Does prequalification affect your credit score?
When you do a prequalification, the lender, in most cases, does not require a credit report so there should be no effect on your credit score.
Why is getting approved for a mortgage important?
Preapproval for a mortgage can make all the difference in your home buying process and this is especially true if you are in a highly competitive market. A preapproval shows the sellers and the real estate agent that you are already approved for the price of the home and that closing should not be a problem. This often puts you higher in the seller’s eyes when it comes to multiple offers.
Can I skip prequalification and get preapproved?
Yes, prequalification is not required, and you can opt to apply for preapproval right away.
Use prequalification and preapproval to your advantage
Choosing to use prequalification or preapproval can give you an advantage when starting the search for your perfect home. While a preapproval does offer more in terms of buyer power, a prequalification gives you a good idea of what you can really afford.
At Hero Home Programs, we strive to help buyers find the home of their dreams and we can help walk you through the prequalification or preapproval process. To learn how we can help you move into your new home, schedule a consultation with us today.