You may have heard that you need to pre-qualify or get pre-approved for a mortgage before you start looking for a new home. But although the terms are similar, they don’t mean exactly the same thing.
Prequalification is the first step, where the mortgage lender tells you how big of a loan you’re likely to qualify for, based on a few basic details. Preapproval is the next step, where the lender verifies your information and checks your credit score before giving you a conditional commitment to lend you the money for your new home.
Prequalification
When a lender prequalifies you for a specific loan amount, it doesn’t necessarily guarantee that you will get a loan for that amount — or that you’ll get a loan at all.
To get prequalified, you have a quick discussion with your lender about your income, credit, assets and debts. Then, the lender gives you a ballpark idea of the loan amount you qualify for. The lender doesn’t verify your information or check your credit, so this loan amount is really just an estimate.
Getting prequalified can give you a general idea of how much you could borrow, and you also learn about the lender’s policies and procedures, which can help you find a lender who’s right for you.
Preapproval
Preapproval is a much more in-depth evaluation of your eligibility for a mortgage. You’ll need to provide the lender with proof of your income and assets, including income tax returns, W-2 statements and more — take a look at our Mortgage Application Checklist for details.
Using the information in these records, your lender will check 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. Your letter 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. This gives you a maximum price limit you can spend on a home, so you can start looking at open houses.
The Advantages of Preapproval
It’s possible to make an offer on a house with just a prequalification letter, but preapproval gives you an edge over other buyers when you’re negotiating with a seller. Sellers take you a lot more seriously — and are more willing to move forward with your offer — if they see that you’re preapproved. They don’t want to run the risk of accepting your offer based on prequalification alone and then having problems if you can’t actually get approved for the mortgage.
All of these steps can be confusing, especially if you’re a first-time homebuyer. If you need some guidance, take a look at our Homebuyer’s Guide or talk with a VyStar Mortgage Loan Officer for more information.