In the world of home loans, what is the difference between prequalification and preapproval? Yes, these two terms sound similar, and they are sometimes even used interchangeably. However, they actually have distinct meanings and come with their own sets of pros and cons. So if you’re hoping to buy a home soon, you’ll need to understand the difference so that you can choose the right one for your plans.
The Difference Between Prequalification and Preapproval
If you’re trying to pinpoint the difference between prequalification and preapproval, it may help to break it down. Consider what is involved in getting prequalified versus what is needed to get preapproved. Then, think about the results of the two processes. Finally, compare the two so that you can see which one is the best choice for your particular situation.
What Is Involved?
With both mortgage prequalification and mortgage preapproval, the goal is to figure out how much a lender will allow you to borrow. What sets the two processes apart? As NerdWallet explains, prequalification is a quick estimate, and preapproval requires more time and more evidence.
When you get prequalified, you provide the lender with information about your income, credit, debt, and assets. They’ll use the numbers that you give them to work up an estimate. Some may do a credit check, but others will simply accept the information provided. In contrast, the preapproval process is much more complicated. You’ll not only be expected to provide more information but also need to back it up with the proper documentation, and a credit check will certainly be part of the process. Be prepared to provide W-2s, current pay stubs, bank statements, and summaries of your assets and monthly expenses. Ultimately, it’s very similar to filling out a mortgage application. In fact, some lenders use the same form.
What Results Can You Expect?
What do get in return for getting prequalified? In a relatively brief time, normally one to three days, you’ll get a prequalification letter that includes an estimate of how much you could expect to borrow. It’s not binding, but it can help you figure out what your house-hunting budget might be.
The preapproval process also produces a letter, but this one carries more detail and more influence. As Investopedia indicates, a preapproval letter includes the loan amount and terms that the lender is willing to offer. Like a prequalification letter, it gives aspiring homebuyers insight into how much they can afford to spend on a home. However, it also offers an additional advantage. Because it indicates to real estate agents and sellers that the buyers are a step away from being approved, a preapproval letter can carry real weight as you’re shopping for a home.
Prequalification vs. Preapproval
As Dave Ramsey points out, both prequalification and preapproval help you determine how much you can borrow. Neither option requires a commitment to the lender or serves as a guarantee that you’ll get a loan. However, a mortgage prequalification is just a rough estimate. It’s handy if you’re curious, and you want an idea of how your financial situation would shape your ability to get a home loan, but it doesn’t carry much weight. A mortgage preapproval takes more time and effort, but it delivers a more accurate picture, and having a preapproval letter can add to your credibility as a homebuyer. As an added bonus, getting preapproved can speed up the approval process because you’ll already have provided much of the required documentation. So, if you want to feel confident that you can get a loan, have the evidence needed to convince sellers that you’re ready to buy, and are eager to power through the approval process without delay, then getting preapproved makes sense.
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