How it works: prequalification vs. preapproval
In today’s competitive real estate market, getting prequalified or preapproved for a mortgage loan can provide the edge you need to get the home you want. Both steps are extremely helpful, but there’s a distinct difference between the two.Prequalification
Before you begin looking for a home, getting prequalified for a mortgage is an excellent first step. It’s a quick way to gauge how much you can afford to spend.
Here’s how it works:
- Verbally provide your personal financial information to your lender and authorize them to pull a credit report.
- Based on this information, your lender will estimate how much you would be eligible to borrow and your monthly mortgage payments.
- Your financial information is not submitted to an underwriter for a review, nor is it formally verified.
- It’s important to note that obtaining a prequalification is NOT a guarantee of a loan.
Getting preapproved in advance of looking for a property goes beyond prequalification, providing you with a conditional commitment from a lender that may help real estate agents and sellers take your offer more seriously.
Here’s how it works:
- Complete a mortgage loan application and be prepared to provide your lender with documentation to verify your finances, including:
* Pay stubs that cover the past 30-day period
* W2 forms for the past two years
* Bank statements for the past two months
* Proof of investment and retirement accounts
* Federal tax returns for the past two years (necessary only if you are self-employed, employed by a family-owned company, or receive bonus or commission income)
- Once you have completed the previous step, your application is submitted to underwriting for a formal credit review and decision, including terms and conditions that must be met for final loan approval.
- Remember, a preapproval is a conditional commitment from a lender to secure your mortgage financing, which helps make you a more attractive candidate when purchasing a home. It isn’t a guarantee, but it can be very helpful to you in your search for a new home.
A preapproval letter assures the seller that you have funds for the down payment and that you have a lender willing to provide the mortgage you need to buy the home you want.
Here’s an infographic contrasting prequalification and preapproval that you might find useful.