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What’s the Difference Between a Preapproval and a Prequalification?

Once you decide to make the first moves toward becoming a homeowner, you should familiarize yourself with each part of the process and the proper order in which you should proceed. Many people believe you should jump right into going to open houses and picking out furniture, but that’s actually a bit further down the list.

One of the very first things you should do is take an honest look at your finances. Ask yourself if you’re in the right place emotionally and financially for making such a long-term commitment. Buying a house is one of the biggest investments many people have ever made.

You’ll definitely want to consult with an experienced mortgage lender as part of your real estate team. As you work closely with them to review your credit score and other factors, you’ll come across the terms “preapproval” and “prequalification.”

What’s the difference between these terms, and how do they affect your purchasing power when it’s time to make an offer?

It’s all in the documentation

While preapproval and prequalification are sometimes used interchangeably, they are not quite the same. And having one, versus the other, could be the difference between landing your dream home, and missing out on an opportunity.

A mortgage prequalification is a relatively simple and informal procedure where you submit some basic financial information to receive an interest rate quote and an idea of the loan amount you’re likely to qualify for. It’s one of the first things you should do so you have a realistic idea of your budget. 

Because you don’t have to supply the full array of documentation at this time, a prequalification is only an estimate of your loan amount. Some lenders may perform what’s known as a soft credit inquiry to get a quick overview of your financial health, and this doesn’t have any impact on your score. 

However, since you’re not going through the more thorough course yet, a prequalification letter doesn’t quite carry the weight of a preapproval one when it comes time to make an offer in a competitive market.

Getting prequalified is a reasonable place to start, and you’ll be able to understand various rate options through a fairly quick process. This shows a seller you have the potential to play ball, but if you’re ready to take it to the next level, then you’ll need to prepare your financial documents for preapproval.

Time to get serious

When you’re ready to apply for a mortgage preapproval, your lender will require a variety of paperwork related to several key factors, such as:

  • Proving your identity
  • Your debt-to-income ratio
  • Credit history and score
  • Your total income
  • Employment and housing history
  • Other investments and assets
  • Whether you have funds for a down payment
  • Bank accounts, retirement funds, or inheritances

Be prepared to present tax returns, bank statements, pay stubs, insurance records, online payment histories, and a myriad of other documentation related to your current debt and future ability to make your mortgage payments.

Getting a preapproval letter takes longer than a prequalification letter because all of the information you provide is going to be verified by a loan underwriter. It’s basically a mortgage application without a specific house attached to it. 

While preapproval letters typically last for 60 to 90 days, the home buying adventure can take several months or longer, depending on the market where you are looking to live. You may have to apply for preapproval more than once.

It’s unquestionably worth the work though, as coming to the table armed with preapproval helps your cause tremendously as a potential buyer, as many sellers these days have a lot of competing offers. Sitting down with a preapproval letter is the next best thing to paying in cash.

You also don’t have to show your full approval amount if you’d like to reserve a bit of negotiating power. Your real estate team will guide you through the complexities of offers and counter-offers, but you can request a preapproval letter in an amount that’s lower than your loan total if you want to have a bit of wiggle room.

What’s next

Finding the perfect residence for you and your family in the Chicagoland area is sure to be an exciting and challenging evolution. But there are absolutely certain things you should not do during this time.  

These actions to avoid include: switching jobs or becoming self-employed, making another large purchase (especially on credit), opening a new charge card, or moving massive quantities of money around between accounts.

Be honest with yourself, your lender, and your real estate team. Focus on the positive aspects of the experience, try to reduce stress, and know that soon you’ll be completing the closing process and enjoying all the benefits of being a homeowner. 

The answers you need

If you’re unsure about where to start, I’m here to help! With over 15 years of experience in the real estate and mortgage industry, I can guide you through this exhilarating and sometimes frustrating journey. From prequalification through the closing, you deserve to have an expert by your side who has your best interests in mind. Ready to get started? Let’s talk!

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