Taking out a mortgage can be an exciting time, especially for first-time homebuyers. However, all the steps involved can also make the process time-consuming. If you're in the market for a home loan, it's likely you've heard the terms "prequalification" and "preapproval" tossed around in conversation, on the web, or in advertisements from lenders.
While these two concepts are related, they refer to entirely different stages within the mortgage process. Yet many borrowers may think both words mean the same thing, especially if they haven't encountered such terms before. It's important to understand exactly what each refers to, as both are a way to streamline the steps it takes to get a mortgage. Here's a primer on mortgage prequalification vs. preapproval to ensure your homebuying process is a smooth as possible.
The fundamental difference to understand is that prequalification occurs before you've even really began the mortgage process in earnest. In many ways, prequalification is one of the first concrete steps a homebuyer can take to secure a mortgage.
At a basic level, prequalification from a lender means getting a thumbs up on your ability to get a mortgage. A bank or other lending institution will ask that you supply financial information like income, debt and other assets. This can happen in person, over the phone, or even online. By doing this, the lender can piece together a broad view of your financial standing and history. Having this insight will give the lender a better idea of what risk you present and allow them to roughly estimate how much you can borrow.
It typically takes as few as three days to receive word on prequalification, and at no cost. Prequalification also provides you with an opportunity to begin a discussion with the lender about goals for you home loan, as well as ask how the experience will play out.
Although prequalification can be useful during the beginning phases of a home search, it is not a guarantee that you will get the loan. This fact highlights the difference between prequalification and preapproval best. Prequalification is a less formal projection that focuses only on whether or not you can expect to qualify for a home loan (as it does not take into account credit score or other measures). It is not binding in any way, but can still be useful when shopping for a home.
Much more valuable in negotiations for buying a home is mortgage preapproval. In contrast to prequalification, preapproval is a confirmation from the lender that you can secure a home loan of a certain amount. Prequalification is often referred to as a "first step," whereas preapproval is viewed as the "next step."
So what does preapproval entail? To begin with, you have to be deeper into the mortgage process. That means having submitted a formal home loan application to the lender, as well as supplying more detailed documentation on your current and previous finances. Preapproval happens after the lender has checked your credit score, as well as considered other metrics like loan-to-value or debt-to-income ratio and decided what interest rate will be attached to the mortgage.
While preapproval can be a more involved process, it is highly valuable when buying a home. Preapproval shows a seller that you are step closer to approval for a mortgage of a certain amount (which is still contingent on underwriting and closing). This can give you an advantage over other buyers who have less of a formal backing from their lender of choice. In some competitive housing markets, preapproval may even be a requirement of sellers.
Be on the lookout for a letter of prequalification or preapproval once you complete the necessary steps. Lenders should send you a formal letter that lays out exactly what goes on. For instance, the prequalification letter should disclose what other factors may affect future approval, while a preapproval letter should set out all the details of the mortgage. Also, be sure to carry these materials with you when visiting open houses, as you don't want to go through all that effort only to forget crucial documentation.
Yet another thing to be watchful of is how lenders use prequalification and preapproval. Though a distinct difference between them exists, some lenders will use the two interchangeably. It's important that you clarify exactly what these terms mean with the lender whenever seeking a mortgage.
Looking to start the mortgage process and find your new dream home? Contact The Federal Savings Bank today to begin your application.