When you start looking for your first home, it's important to know what you can ultimately afford and how large of a mortgage you can obtain.
To help in this process, you should understand two critical first steps: mortgage preapproval and mortgage prequalification. While they might look similar at first glance, preapproval and prequalification are not the same thing.
Let's examine how these two processes differ as well as why they are crucial in determining how much you can borrow from a mortgage lender.
Prequalification and preapproval are both ways to estimate how large of a mortgage a bank might lend you.
Prequalification is a much more casual process. This means you do not have to provide extensive documentation on your current financial situation. The lender also may or may not pull your credit score during prequalification.
But since this is less formal than a preapproval, you will only receive an estimate of your potential mortgage ranges. This means the final number is subject to change, and the final approval amount, loan program and interest rate may all end up being much different than you were expecting.
To obtain a more precise potential mortgage figure, you will need to obtain preapproval.
Mortgage preapproval takes the prequalification to the next level. This process requires more documentation on your financial situation and on your ability to make the monthly mortgage payments.
When you begin this process, you will need to collect a few years' worth of bank statements, pay stubs, investment holdings, total assets, and proof of any additional income streams. The lender will also pull your credit history, which counts as a hard credit check, to see how much debt you currently carry.
After going through this process, if preapproved, the bank will then be able to provide a much more figure for how much you can borrow for a new home, how much the interest rate will be and the type of loan program.
However, it should be noted that neither preapproval nor prequalification count as guarantees that you will actually obtain the mortgage. But they do serve as good indicators that a bank is willing to work with you. To qualify for the actual mortgage, the lender will still need to approve and finalize the mortgage, which involves a few more steps in the process.
These processes and terms might seem intimidating for first-time homebuyers, but they're designed to help you. With a prequalification and preapproval in hand, you can better focus your time and energy on finding the house of your dreams with your current budget. Otherwise, you might find yourself looking at — and possibly falling in love with — houses that you ultimately cannot buy because you're unable to afford them.
Want to see if you can get a mortgage preapproval? Reach out to The Federal Savings Bank to learn more.