By: Stella Katsipoutis
A few weeks ago, I told you a little about the first time my husband and I strolled into an open house without taking the necessary first steps to searching for a home. As we oohed and aahed through the entrance of the quaint ranch home and headed toward the kitchen, the realtor greeted us and almost immediately asked us if we had been preapproved for a loan. We stopped dead in our tracks. Needless to say, I felt like she was speaking to us in another language. A cold sweat set in, and my hands got clammy as a million questions whizzed through my head. What does that mean? How do we do that? Is it mandatory? Can’t we just look at the pretty house and then deal with that later? Suddenly I felt like we were venturing into a dark and scary place, and I was ready to run right out the door screaming.
Seeing the confusion and fear written all over my face, the realtor kindly suggested with an understanding smile that we speak to a lender about it as soon as possible before we continued looking at other homes. Being a writer, I’m a bit research-obsessed. So when I have a question, I need to find out the answer right away. As soon as George and I got back to our apartment, I switched on my computer and started combing through the Internet for as much information as I could find on loan preapproval.
As I searched, another unexpected, eyebrow-raising word popped up: prequalification. A familiar worry started to rear its ugly head again. What is THIS now? My writer brain kicked in and told me that although the terms “preapproval” and “prequalification” seemed similar enough, there was a slight chance that they meant two totally different things in the world of mortgages. So I did even more investigating and, lo and behold, I was right. It turns out that, while some highly unreliable sources may tell you that getting prequalified and/or preapproved for a mortgage loan is the same exact thing, it’s simply not. In fact, there’s a very stark distinction between the two, and knowing what that distinction is could mean the difference between you getting a loan or not. So how do they differ, you ask? Here’s what I found out thanks to my little research frenzy.
Think of prequalification as your first baby step in the great big world of home ownership. When you get prequalified for a specific loan amount by a lender, it doesn’t necessarily guarantee that you will get a loan for that exact amount—or any amount, for that matter. A prequalification is a fairly superficial assessment of you as a potential buyer and doesn’t hold much power when you’re serious about making an offer on your dream home. The mortgage prequalification process is also a lot less detailed and thorough than the mortgage preapproval process is.
Typically, prequalification entails nothing more than a quick discussion with your lender about your income, credit, assets and debts. Once you’ve gone over this information with them, the lender will give you a ballpark idea of the loan amount you qualify for—without running an actual credit check. It’s a fairly quick process that can be done in person, over the phone or on the Internet. This is also a great time to ask your lender about your different mortgage options and what they think would work best for you. If you want to shop around for a lender and compare rates before settling down with one, this would be the perfect opportunity to do that as well. Prequalification is the best place to start if you’re not in a particular hurry to buy a home or if you’re unsure which lender you want to stick with.
Personally, George and I decided to skip the prequalification process and go straight to preapproval. Although I was still a fairly new employee at VyStar, I already knew that VyStar’s mortgage programs are unbeatable—and they cover closing costs*—so we didn’t want to waste any time looking elsewhere. You have nothing to lose by getting prequalified, but you should aim on getting preapproved right away, like us, if you already have your sights set on a specific lender and are serious about snagging that dream house ASAP.
Preapproval can be considered your rite of passage into “adolescence,” so to speak, before you become a full-fledged homeowner. This next big step is a much more in-depth evaluation of your eligibility for a home loan. At this point, you have to actually sit down with a lender in person and provide them with that important paperwork I talked about in my last post, including income tax returns, W-2 statements and more. (Check out my article for a full list of documents you’ll need to bring with you to your appointment.) Using the information in these records, your lender will run your credit, verify your assets and income and thoroughly examine your financial background.
When they’re done, your lender will hand you a preapproval letter that states the loan amount you’re approved to receive, which acts as a tentative commitment from the lender for that specific amount. It also gives you an estimated monthly payment amount for that loan, so you’ll have a better idea of how much interest you’ll be charged. At this point you will also have a maximum price limit that you’ll have to stay under when you’re shopping around for a house. Your preapproval is good for about 45 days, so it’s important to hit the ground running and start putting in offers as soon as you have your preapproval letter in hand.
You might be wondering, “Can I make an offer on a house with just a prequalification letter?” Yes, you can, but preapproval will give you a much better edge over other buyers when you’re negotiating with a seller. Preapproval shows the seller that you mean business when you place an offer, and it’ll help save you from losing the house of your dreams to someone who is ahead of the game and has their financial affairs in order. Sellers take you a lot more seriously—and are more willing to move forward with your offer—if they see you’re financially prepared. They don’t want to run the risk of accepting your offer based on prequalification alone and then potentially running into problems when your credit is actually checked.
When I sat down with our mortgage loan officer at VyStar, she had our preapproval letter printed and signed in no more than 15 minutes. Rather than running away with fear, I confidently strutted out of that office knowing George and I could officially begin our house hunt and make an offer on the home that stole our hearts. That promised to be a whole new adventure in itself. …
Check back in a few weeks for the latest update on my home search and for more of my tips for first-time home buyers!
*Certain restrictions and limitations apply. All loans are subject to credit approval. No Closing Costs offer available only when obtaining a VyStar Credit Union First Mortgage Loan and is not available on VA, FHA & Reverse Mortgages. Available for purchase or refinance. VyStar will pay borrower closing costs up to a maximum amount of $5,000 excluding origination fee, discount points, private mortgage insurance, prepaid interest, home owner association fees, home inspections (including but not limited to wood destroying organism, roof, and structural engineering), condo document fees or funds to establish the member’s escrow account. If the borrower pays off the mortgage within the first 36 months, they will be required to reimburse VyStar for a portion of the closing costs paid by VyStar. Offer available for a limited time and subject to change without notice.
**The content provided in this blog consists of the opinions and ideas of the author alone and should be used for information purposes only. VyStar Credit Union disclaims any liability for decisions you make based on the information provided.