The terms prequalified and preapproved are sometimes used interchangeably, but it’s important for homebuyers to distinguish one from the other. Understanding these two key steps in mortgage application makes it easier to navigate through the process.
In a nutshell: Prequalification is the first step you take, and it gives you an idea of the possible loan amount you will qualify for. Preapproval is the second step, and it involves a conditional commitment by the bank or the lender to actually grant you the mortgage.
What happens when you prequalify for a mortgage?
The prequalification process is based on data you provided the lender, which helps them determine a ballpark estimate of how much you can borrow.
At this stage, the bank/lender gets a look at your overall financial state (including your debt, income, and assets) but doesn’t need to assess your financial situation and history. This means there will be no evaluation of your credit report or an in-depth analysis of your financial capacity to purchase a house.
Prequalification usually doesn’t involve any fees, and the transaction can take place over the phone or online in the span of just one to three days, after which you get a prequalification letter.
During this step, you can discuss with your lender your specific needs, goals, or plans regarding your mortgage. Your lender can give you an overview of your mortgage options and recommend the best type based on the estimated amount you can borrow and your general financial situation. This is a good time to disclose any financial information that may limit your borrowing capacity, so your financial institution can help you navigate through any obstacles.
Why should you prequalify?
Prequalifying helps when you’re finally ready to make an offer since a prequalification letter is practically expected to accompany an offer. Sellers will want to know whether a lender has determined your prequalification status and will recommend that you get in touch with one to prequalify if you haven’t yet.
What does it mean to get preapproved?
By the time you get to this step, you will need to complete an official mortgage application and provide the bank/lender with all the necessary documentation they will need to thoroughly evaluate your financial background and current credit rating.
You can be preapproved for a mortgage up to a specified amount after your finances have been assessed; and you should by now have a better idea of the interest rate on your loan, which will often be partly based on your credit score. Locking in an interest rate is also possible at this stage.
With some lenders, application for preapproval comes with a fee of several hundred dollars.
During this step, you receive a conditional commitment in writing for a specific loan amount. This means you can now look for a home at or below your loan amount.
Why should you get preapproved?
As a pre-approved buyer, you are now one step closer to an actual mortgage; and if you happen to be interested in the same property as a pre-qualified buyer, you have the advantage—especially as far the seller is concerned, as you are FAR less likely to fall out of escrow. A seller will give more weight to an offer from a pre-approved buyer.
Are you ready to begin your search for your dream home? Contact us to discuss pre-qualifying, and a strategy to sell your home. Team Clancy has real estate and mortgage brokers in-house, providing our clients with a seamless experience, and a team ready to meet their needs.
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