When you prepare to apply for a mortgage, you will come across financing terms like “prequalification” and “preapproval.” It’s important to understand the meaning of these terms, as this will guide your home search by allowing you to understand your buying power and show the seller that you’re a serious and qualified buyer.
At the fundamental level, preapproval and prequalification are types of mortgage approvals, and they refer to the steps a lender has taken to verify that a borrower can afford a mortgage. Here are a couple of points to keep in mind:
Many lenders use prequalification and preapproval interchangeably. Every lender handles mortgage approvals differently and the steps involved change from lender to lender.
No matter matter the type of mortgage you apply for, it’s not a guarantee that you’ll close the loan.
We’ll also explain how our preferred lender handles approvals, so you can know what to expect when you apply for a mortgage.
WHAT IS MORTGAGE PREQUALIFICATION?
A prequalification generally means that the lender collects some basic financial information from you to estimate how much house you can afford.
A prequalification is a ballpark estimate and is less reliable than a preapproval, which usually involves your lender checking your credit score and reviewing bank statements along with other financial documents.
As you begin searching for a home, realtors and sellers want to see you’ve been working with a mortgage lender so they know you can afford to buy a home. You’ll need a qualified real estate agent that can negotiate the best price and terms for you along with a solid preapproval letter.
VERIFIED APPROVAL
After you’ve been approved, you can level up to a verified approval by providing some documentation so your lender can verify your income and assets.
Verifying your income and assets along with your credit history is a more accurate estimate of what you can afford. It also carries more weight with a real estate agent and the seller, because they’ll know we verified that you can afford the home you wish to buy. You can provide your approval letter to your real estate agent and the sellers as proof that you can obtain a large enough mortgage to purchase the home.
SUMMARY
Getting approved early in your home search is a great way to know what you can afford, so you can narrow in on your dream house. To get started, apply for a mortgage and get premium pricing on your interest rate.