Prequalification Vs Preapproval
When navigating the homebuying process, it is important to understand the distinction between prequalification and preapproval. While both steps can provide insight into borrowing capacity, they have different meanings and purposes. Here’s what you should know about prequalification versus preapproval.
What is a Prequalification?
Think of it as a meet and greet for you and your mortgage lender where you provide basic information about your finances, such as annual income, assets and debts. Because this process is based on unverified information, the lender provides an estimate of the loan amount you might qualify for. This is a quick process that can be done over the phone. Some lenders provide a prequalification letter for you to show a real estate agent your house-hunting price range.
What is a Preapproval?
This stage requires you to submit comprehensive financial documentation which typically includes income (paystubs, w2s, etc.), assets (bank statements), and liabilities (hard credit check and possibly additional loan documentation.) Using this information, the bank underwriters will determine how much money you will be able to borrow based on debt-to-income ratios, credit score, and other information provided on your application. Sometimes this can be determined within a few hours, but it can also take several days to a week, depending on the complexity of your scenario. Once everything is reviewed, you’ll be given a preapproval letter detailing your limits the underwriters have deemed you will be able to obtain, including the purchase price and loan amount. The preapproval letter enhances your credibility with sellers and agents and is typically good for 60-90 days. This strengthens your offer and helps you stand out against other potential buyers. It makes you feel more confident approaching the homebuying experience.
Understanding the difference between prequalification and preapproval is critical for prospective homebuyers. Prequalification offers an initial estimate of your borrowing capacity based on self-reported information, serving as a preliminary step in the homebuying journey. In contrast, preapproval involves a comprehensive evaluation of your financial documents and credit history, providing a more accurate assessment of your loan eligibility. This thorough screening not only clarifies your budget but also lets sellers know that you are a serious and credible buyer, which will give you a competitive edge in a tight housing market. While prequalification can help you gauge your readiness to purchase a home, obtaining a preapproval positions you to act quickly and confidently when the right property becomes available. If you are in the homebuying market, we would love to help you out. Reach out to our team of experienced mortgage lenders to get started! It is important to note that the above information is based on practices at Pennian Bank and it may vary depending on the lender you use.
