Prequalification Vs. Preapproval For Your Home Loan Mortgage
11/23/2010 If you’re looking for a mortgage to fund your upcoming home purchase and you’ve done some research, you may have heard the terms “prequalification” and “preapproval” used by lenders, brokers, or real estate agents. These terms sound similar, but they actually refer to two entirely different things. Read on to learn about the differences.
In both cases, the goal is to determine how much mortgage funding you can expect to receive before you make an offer on a home to a seller. Many sellers won’t entertain offers made by potential buyers who aren’t prequalified or preapproved in some way or another. But the two techniques are different.
Prequalification
Prequalification is simply the lender’s opinion as to whether or not you’ll qualify for a loan and how much you’ll qualify for. This opinion is often provided in written form, either as a letter or as a certificate, but this does not make it contractual. The lender is guaranteeing you nothing. If he or she says you’ll qualify for one of the lowest mortgage rates, great. But this is just an opinion, an educated guess.
Prequalification is a helpful step. Real estate professionals and sellers will take you much more seriously if you have an idea of what you’ll qualify for, and that certificate isn’t worthless. But it’s just a starting point, and it has a critical flaw. The flaw is that the lender bases his or her opinion on information provided solely by the borrower. None of the information is verified, not even the applicant’s credit score. In this way, prequalification isn’t much more than a hypothetical exercise.
Preapproval
Preapproval is much like prequalification, except that all information is verified by the lender. The lender checks all the information provided as though the borrower was actually applying for a loan. Credit is pulled, employment history is checked, and so on. The lender then issues a different kind of certificate that all but guarantees the loan.
Technically, a preapproval still doesn’t guarantee that you’ll get a loan with the rate and terms promised to you, because every preapproval certificate comes with certain disclaimers attached. Usually, the loan is guaranteed to you unless your employment status or credit score change significantly. The home you decide on must appraise at a high enough amount as well, and overall market interest rates must remain mostly unchanged.
Beyond these disclaimers, however, a preapproval certificate will convince any seller that you’re ready to buy. Don’t waste time with prequalification, if you can help it. Skip right to preapproval.
