Prequalification VS Preapproval –What’s the difference when applying for a new home loan? This is a questions asked of real estate professionals every day. While these two terms are often used interchangeably buy home-buyers (and some realtors), they are not the same thing and knowing the difference between these two terms can save valuable time and untold headaches to buyers and realtors alike.
Many realtors request buyers to speak to a lender before beginning to preview properties. It is often the case that a realtor has several qualified lending partners with whom they have established a working relationship. For example, due to our respect for her expertise and professionalism, The Carolina Crew works closely Ashley McKenzie-Sharpe of Fairway Mortgage. Without understanding of difference between prequalification VS preapproval potential homebuyers often balk at this suggestion, insisting they will talk to a lender AFTER they have found the perfect property. What these real estate professionals are asking the buyer to do is take an initial step in the mortgage process. With loan prequalification a loan officer will ask the buyer to provide an overview of their financial picture including their income, debt and assets. Armed with this (unsubstantiated) information the lender will make an educated estimate of how much house a particular buyer can afford. This unofficial step can be done in person, over the telephone or even on-line. At this point the lender can explain various loan options and recommend the type of loan best suited to the buyer’s goals. The most important thing about this step is that it is an estimate, not a sure thing for either the buyer or the realtor. Prequalification VS preapproval reveals just the amount for which you might expect to be approved. It can give the buyer and real estate professional a starting point in setting a home search price point. This step carries little or no weight with a prospective seller.
By contrast, getting preapproved tends to be more involved for both the borrower and the lender. At this point the buyer completes an official mortgage application and often incurs an application fee. The buyer must then provide the lender with the documentation necessary to verify information on earned income, current debt and credit rating. From this, the lender can tell the potential buyer whether or not they are credit worthy to obtain a home mortgage and the specific mortgage amount for which they can be approved. (If documentation indicates credit issues preventing the buyer from obtaining a loan, the lender will discuss timelines and remedies needed to correct these credit issues). It is at this point a buyer can best determine the interest rate they will be charged on the loan and in some cases can lock in a preferred rate for a specified duration of time. With preapproval the buyer will receive conditional loan commitment letter for the exact loan amount for which the borrower qualifies. It is this step that puts the buyer at a distinct in the eyes of a potential seller. When asking prequalification VS preapproval it is the most prudent for buyer to complete the latter step (preapproval) before beginning to search for their dream home. Once the buyer has identified the home they wish to purchase and provides the lender with this information, the pre-approval application is complete.
Once the buyer is under contract on a home the final step in the process is called loan commitment, and is issued by a lender only when it has approved both the borrower and the house in question. This means that the bank determines that the home’s appraised value is at or above the sales price. At this stage the buyer’s income and credit profile is re-checked to ensure nothing has changed since the initial approval. The loan commitment letter is issued only when the lending institution is certain it will lend. Be warned, prequalification VS preapproval are not the same thing however, both are critical steps in the lending process.
If you are ready to start searching for your next home and wish to discuss the process in detail click the Carolina Crew of Keller Williams Realty or call us @336-355-REAL (7325).