Published on August 30, 2023 | 6 Minute read
Prequalification or Preapproval? These financial gateways can hold the keys to your homeownership dreams, but it's important to understand the distinctions between them before you take the plunge.
Let's start with the basics. Getting pre-qualified for a mortgage is like dipping your toes into the homebuying waters. It's a preliminary step that gives you a general idea of how much money you may be able to borrow from a lender.
Typically, prequalification involves a quick chat with a mortgage lender or filling out an online form where you provide basic financial information such as your income, assets, and debts. Based on this information, the lender will give you an estimated loan amount for which you may be eligible. Keep in mind that prequalification doesn't involve a deep dive into your financial history. Lenders don't pull your credit report or verify the information you provide at this stage. It's more of an educated guess based on the details you share.
One of the perks of prequalification is that it's not binding. You're not locked into anything, and it doesn't impact your credit score. Think of it as a "test run" to gauge your homebuying potential. Here are some prequalification takeaways:
Prequalification is handy when you're just starting your homebuying journey. It helps you set a budget, narrow down your options, and gives you a general idea of what to expect. However, it's important to remember that a prequalification isn't a guarantee you'll secure a mortgage for that amount. It's more like a roadmap – a suggested path to follow on your quest for homeownership.
Now, let's move to the next level – preapproval. This is where things get a bit more serious, and you get a golden ticket to house-hunting.
Preapproval takes things a step further. It's like wading deeper into the homebuying waters and getting a more accurate picture of what you can afford. For a preapproval, you'll need to submit a formal mortgage application and provide detailed documentation of your financial situation. This may include pay stubs, bank statements, tax returns, and any other relevant financial information. The lender will then review your application, thoroughly evaluate your creditworthiness, and determine the maximum loan amount they're willing to lend you. With a preapproval letter in hand, you can house hunt with confidence. Here are some takeaways from the preapproval process:
So, why does preapproval matter? When you're preapproved, you know precisely how much you can borrow and what your interest rate might be. This gives you a significant advantage when negotiating with sellers, as it shows you're a serious and qualified buyer. Sellers tend to take preapproved buyers more seriously because they've already gone through the rigorous process of applying for a mortgage and have the lender's stamp of approval. It shows that you're a serious contender with the financial means to back up your offer. Another perk? A preapproval letter can expedite the mortgage process when you find your dream home. Since much of the legwork is already done, you can often close the deal faster.
Keep in mind that preapproval involves a credit check, which can have a slight, temporary impact on your credit score. However, this is typically outweighed by the benefits of knowing your borrowing power.
Let’s Compare the Two
In summary, prequalification is an excellent starting point if you're in the initial stages of your house-hunting journey. It helps you understand what price range you should be looking at and gives you an idea of what you can comfortably afford. However, it relies on self-reported information and lacks the certainty of preapproval.
Preapproval is the next logical step when you're ready to delve deeply into your homebuying journey. It provides a comprehensive understanding of your financial capacity, interest rates and a solid foundation for negotiation.
Now, let's talk about timeframes. Prequalification is typically a quick and straightforward process. You can get pre-qualified online or over the phone within minutes or a few hours. Preapproval, on the other hand, takes a bit more time because of the thorough evaluation of your financial situation. Depending on your lender's process and how swiftly you can provide the necessary documentation, it can range from a few days to a couple of weeks.
Regarding credit checks, prequalification usually does not involve a deep dive into your credit history. Lenders may perform a soft credit inquiry, which does not impact your credit score. Preapproval does require a hard credit inquiry, which can temporarily impact your credit score. However, don't worry too much about this, as the impact is typically minimal and short-lived.
Which One is Right For You?
So, which one should you choose – prequalification or preapproval? Well, it depends on where you are in your homebuying journey.
Start with Prequalification - If you're in the early stages, unsure of your budget, or simply curious, start with prequalification. It's a low-stress way to gauge your potential.
Level Up to Preapproval - Once you're ready to take the plunge and start house hunting seriously, upgrade to preapproval. It's your golden ticket to a smoother homebuying process and increased confidence in your search.
Getting pre-approved is definitely a stronger position to be in when you're ready to make an offer on your dream home. This may all seem overwhelming, especially if you're new to the homebuying world. But fear not! Remember, there are professionals who are well-versed in this stuff and can guide you through the process. Reach out to a trusted mortgage lender or a mortgage broker who can answer any questions you may have and help you decide which route is best for you. But don't stress too much. Take it one step at a time, and enjoy the journey towards becoming a homeowner. You've got this!