What is the Difference Between Pre-Qualification and Pre-Approval?
In the world of real estate, it’s not uncommon to confuse “prequalification” with “preapproval”. However, the two terms aren’t as interchangeable as some people make them out to be. It’s important to understand the difference between getting prequalified and getting preapproved, so that your home-buying or selling experience can be as stress-free as possible.
What is Prequalification?
Getting prequalified for a mortgage is one of the first steps in the home-buying process. It offers an estimate of what you might be able to borrow from a lender. This estimate is based upon information you provide verbally, including your income and assets. In many situations, prequalification does not include a credit check and is offered by lenders at no cost. It is a far less formal process than pre-approval and can often be done online or by phone.
What is Preapproval?
Mortgage preapproval is a more in-depth and accurate assessment of your financial standing. Upon getting preapproved, you will be asked to provide documentation of your income, assets, and debt as part of your application. Additionally, the lender will ask for an application fee, run a credit check, and verify your employment and financial information. Preapproval may have a longer, more in depth application process, but it allows you to move quickly when you’re ready to make an offer on a home. Getting preapproved also gives you a better idea of what houses you can afford, and what your mortgage may look like. While preapproval does reflect your ability to pay, your likelihood of getting a mortgage and your intent to buy; it is not a commitment to a lender.
Which one do you need?
Prequalification is a great option if you’re not completely committed to a house hunt, but want to investigate cities and neighborhoods that appeal to you. It also may be a good idea if you have credit history issues that you need to fix before applying for preapproval. Prequalification is useful because it quickly gives you a rough estimate of the loan amount and monthly payment that you can reasonably afford. It will allow you to have a better understanding of the homes in your price range and how changes in price will affect your budget down the line. Remember, with prequalification, the estimates you receive may be slightly less accurate due to the fact that the lender is making a rough guess as to what your mortgage will be based on the information you give them.
Preapproval is useful when you’re serious about buying a home and want to show the seller that you’re committed to buying. It proves that you have the backing and ability to go through with the sale, and that you’re ready to move forward. It also gives you an advantage over other, less prepared buyers. If you’re preapproved, you can make an offer faster, due to the fact that you don’t have to wait for a detailed background check. If your credit is in good shape and you’re ready to begin a serious house hunt, pre-approval is a smart first step. It will give you a better understanding of what you can afford, and it’ll give sellers confidence that you’re trustworthy and capable of buying.
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