If you’re thinking about buying your first home, you’re likely going to come across some new terms that will be unfamiliar to you. In order to be your own best advocate and an informed consumer, it helps to learn some of the mortgage industry jargon. Two of the most important terms you will bump into while applying for mortgages are “preapproval” and “prequalification.” Most people – even some lenders – get these two terms mixed up, but they are not the same!
Understanding these terms and the difference between being “preapproval” and “prequalified” will help prepare you for the mortgage process and become a more informed negotiator.
If you want to show a seller that you’re serious about the sale or know if you’re making an offer that will put you in the best position for getting the property without exceeding your budget, you need to know what these terms mean and how they’ll impact your mortgage.
Read more to learn about the difference between being preapproved vs. prequalified!
When you’re prequalified, it means that a lender has looked over your financial situation and given you an estimate of how much you’ll be able to borrow for the mortgage. However, by “looking over your financial situation”, we mean that they’ll review the information that you report to them. Lenders typically don’t do any hard fact-checking for prequalification.
That’s one reason we always recommend working with a financial advisor prior to embarking upon the mortgage process to assess your finances and help your broker find the best and most realistic mortgage options for you.
Because the lender can only take your word for it, they’ll only give you a ballpark estimate, so it isn’t completely reliable. However, once you’re prequalified, you’ll receive a “prequalification letter” that will prove to the seller you’re serious about the house and working with lenders to prepare for a sale. The lender will have to take it with a grain of salt since nothing is fact-checked, but it’s better than nothing and it’s the first step on the road to getting approved for a mortgage.
While “preapproval” sounds similar to “prequalified” this step is much more involved. And, don’t let the “pre” prefix fool you into not taking this step seriously. To get preapproved, your lender will have to do rigorous research. The lender will dig deep into your financials and credit history in order to give you a defined estimate for your loan amount, your interest rate, and the terms of your mortgage. Lenders will typically scope out proof of your income (like pay stubs and tax returns), look into your credit score, and even confirm everything using your Social Security card. They want to know everything they can, including your employment status, your annual income, your assets, and your debts. Once they have done so, if you meet the requirements of the loan, you will then receive a statement for the seller that you have been preapproved.
Since your preapproval comes with verification that you can, in fact, afford to buy a house, a confirmation of preapproval will clearly demonstrate to the seller or their agent that you mean business.
While this sounds great, there are two things we want you to keep in mind:
While the words “preapproval” and “prequalification” are often used interchangeably, they’re vastly different from one another. If you’re planning to buy a home, it’s important to fully understand the difference between the two.
The major differences between preapproval and prequalification are as follows.
During the prequalification process, the information you need to provide to the lender is limited. Typically, they’ll just have you report your basic financial information. Preapproval, on the other hand, is a complex process that requires you to provide way more information and documentation. Depending on the lender, this might include copies of recent pay stubs, bank account statements, W-2 statements, signed tax returns from the past year or so, and even your Social Security card.
While lenders will all take different amounts of time to get you a preapproval or prequalification letter, preapproval always takes significantly longer than prequalification.
Since the loan officer will request a lot more information from you, the process of verifying all of your information can take several days. In most cases, it takes somewhere around 7 – 10 business days. The results of your mortgage prequalification, on the other hand, can be determined within the hour if your lender isn’t too busy. Depending on your lender’s workload, however, this could still take up to a few days.
Want to speed up the mortgage process?
Reach out to ASTAR Home Capital today! You’ll be well on your way to finally experiencing the pleasure of hearing the words, “you’re approved.”
The Information They Give You
Another key difference between being prequalified and preapproved is the information the lender will give you. The pre-qualification will only give you a ballpark estimate of the mortgage amount the lender can let you borrow. Since the prequalification process only asks you to provide basic information about your financial history, lenders will only give you a rough estimate and indicate whether you can qualify for a mortgage once you decide to actually apply for one.
Applying for preapproval, on the other hand, is more like completing an official mortgage application. Since the lender performs such extensive financial background and credit checks on you, you will ge a more exact number from the lender and get a much better idea of what amount you can potentially borrow. After a preapproval, a lender will usually let you know the exact home loan amount that they’re willing to offer you. The lender will often give you other important details about your potential mortgage as well, such as the interest rate they’d offer and the terms they’d include in your agreement.
Both preapproval and prequalification will help you gauge your readiness to purchase a home. However, since mortgage preapproval is generally more thorough, your preapproval letter will carry more weight during your home buying journey. With your preapproval, you’ll know the exact maximum amount that you can borrow, allowing you to set your sights only on the homes you can truly afford.
Home sellers will want to know if you’re preapproved as this helps them determine whether or not you’re seriously considering the purchase. If you have a preapproval letter, you’ll have a competitive edge over potential buyers who haven’t been preapproved yet. Additionally, your real estate agent may ask you for a preapproval letter in order to help them narrow their search down to listings that fit your price range.
Another advantage of getting your mortgage preapproved is that it can potentially exempt you from any sudden increase in mortgage rates (interest charged on a mortgage) that the lender implements. A preapproval letter has a validity that lasts about 90 days, so if you’re able to close on the property before it expires, you may still qualify for the lower interest rate that was available when you were first preapproved.
However, despite all of the advantages that mortgage preapproval carries, it’s still a good idea to get yourself prequalified first. A prequalification letter is a great tool for potential home buyers who are still testing the waters or are still in the early stages of their home-buying journey.
Applying for a mortgage can be extremely difficult and time-consuming, especially when you’re trying to find the ones with the best interest rates. To find the best mortgage options for your financial needs and goals, you’ll want to work with a reliable mortgage broker.
A mortgage broker is a lot of things to their clients — they’re a lookout, a guide, a networker, a negotiator, an advisor, and more.
Your mortgage broker can help you find the best mortgage options for you and guide you through the prequalification process, the preapproval process, and even the final application. Since they work with all sorts of different lenders, brokers can explore multiple options and can often connect you with a lender that’s willing to give you a good mortgage amount at a decent interest rate and with reasonable terms. One of the main benefits of working with a broker over a single lender is that a broker can usually find a mortgage that’s right for you rather than a one-size-fits-all offer.
Your mortgage broker can also negotiate for better terms and conditions with your preferred lender and provide you with expert advice, helping you properly manage your repayments and avoid falling into financial distress.
Understanding the difference between mortgage preapproval and mortgage prequalification will not only help you navigate your home-buying journey; it’ll also help you demonstrate to sellers that you’re a savvy and serious buyer who means business.
Few buyers, even ones with more real estate knowledge, know what they’re doing 100% of the time — and that’s okay. When it comes to mortgage applications, you don’t have to handle it all by yourself!
If you want professional support, seek out help from a mortgage broker. With their keen eye, clever negotiation tactics, expert advice, and knowledge of the industry, you’ll be able to get a better mortgage that puts you on track for financial success in a home that you love.
Want to hear that wonderful phrase, “your loan is approved,” sooner rather than later?Reach out to one of our ASTAR Home Capital mortgage experts today! Email firstname.lastname@example.org or call 888-ASTAR-11 (888-278-2711) to start the loan application process.