What is Pre Approval Versus Pre Qualification
One of the most important steps that you will need to take to purchase a new home is to obtain financing for the purchase. Whether you are working with a mortgage broker or your local bank, you will hear several different terms used during the process. Two of the most common and confusing phrases that come up are preapproval and prequalification. Let's take a look at what each of these means and how it can have an impact on whether a seller will agree to your offer to purchase their home.
What Does Prequalification Mean?
Prequalification is the first step towards getting approved for your new loan. Often people get confused because they believe that prequalified means they are guaranteed a loan or interest rate. This is not the case. Prequalifying for a loan is a minor first step towards actually obtaining financing. Your lender or mortgage broker can quickly prequalify you by running a credit check and asking simple questions that allow them to get an idea of your current financial situation and a ballpark of what types of loan options you might qualify for. Ultimately, none of this information has been verified with documents, which means that any information that has been left out during the prequalification process can substantially change your loan options.
A good real estate agent will tell a home selling client that a prequalification isn't really worth the paper it's printed on. That shouldn't take away from the fact that it is an important first step in the loan process because having your credit pulled and looking at the possible interest rates and types of loans that might be available to you will help you get a broad idea of your options. This works like an early warning system that allows you to correct any mistakes in your credit report, or take actions to improve your credit score, while giving you a budget on the type of house that you will most likely be able to afford. Just keep in mind that you are not given a guarantee with your prequalification. You need to complete a loan application and have all of the information verified by an underwriter before you will receive a true approval for a loan.
What Does Preapproval Mean?
Getting preapproved is what really counts. To get a preapproval on a loan you must have submitted a mortgage application with all of the required documents that prove your financial status. These go to the underwriting department of the lender for verification. Once they have confirmed the documents they can give you a full approval for a loan. At this point, the loan type and interest rates you are quoted are true numbers that you have to choose from. Keep in mind that these numbers can still fluctuate as the market for loans changes. You must choose your loan and lock your rate in order to truly have a final set of numbers that will not change.
Pre Approved Subject to Appraisal Only
The gold standard for proving to a seller that you are a committed and qualified buyer is to obtain preapproval on a loan subject to appraisal only. Often, buyers will get prequalified (which is quick, easy, and means very little) and then begin making offers on homes. If the seller has a good real estate agent they will be educated on the fact that an offer from someone who was preapproved is more solid than someone who is only prequalified. This means that you can actually lose the home to another buyer if you haven't taken the steps to get fully preapproved on your loan. Even if you offer a little bit better price or terms, you can be trumped by someone who was preapproved for a loan because there is a higher likelihood that they will truly be able to close, whereas your ability to complete the sale is still in question.
Now that you understand the difference between prequalification and preapproval, you need to speak with your real estate agent and possible lenders to find out what it takes to achieve a preapproval on a loan. With this in hand you are ready to make an offer on a home with confidence.