If you’re starting the process of buying a home, you may have been told you should get prequalified for a loan, which could lead you to believe that you’re all set after you do so. But when the time comes to actually secure the financing for your home, you’ll quickly find that being prequalified for a mortgage and being preapproved are two very different things.
What does each term mean, and should you seek prequalification or preapproval before putting in a bid on a home? Here’s a look at what you need to know about prequalification vs. preapproval.
The Difference Between Being Prequalified and Preapproved
When you’re prequalified for a loan, you’ve submitted basic information about your financial situation to a potential lender, who in turn has estimated a dollar figure of the mortgage you’re expected to be approved for. Prequalification does not mean:
- You have been approved for a loan
- You can actually afford to make the payments on the mortgage
- Your financials have been thoroughly vetted
You can usually receive prequalification with a phone call or by filling out a form online. It’s normally free, and does not include pulling a credit report. Prequalification is not a guarantee of anything. A lender may not approve you for the amount you have been prequalified for, after giving your financials a more in-depth look. While being prequalified is certainly better than offering a buyer nothing at all, being preapproved for a loan offers a much stronger vote of confidence in your financial situation.
You should get prequalified for a mortgage as a show of good faith in the home buying process. This is a bare minimum to show a seller you are serious about purchasing their home. If you’re not prequalified and another buyer is, the seller may well go with the other offer, even if it’s lower, because of that financial vote of confidence. You’ll also have a better idea of what properties you can afford when you get prequalified. It’s not worth looking at homes you can’t afford to purchase.
Preapproval comes after you’ve been prequalified. You must fill out a mortgage application (and typically pay a fee), even though you have not made a bid on a particular property. The bank or lender may then look at a number of financial documents, including, but not limited to:
- Tax returns
- Credit reports
After examining this information, the bank or lender will determine a specific mortgage amount you’re approved for. They may also give you a range of interest rates or one specific rate, and some will allow you to lock in that rate for a limited time for your future loan. The lender or bank will give you a conditional commitment in writing for a specific loan amount that you can show the seller, giving them confidence you can come through with the money you offer, subject to the appraised value of the property.
In a competitive real estate market, getting preapproved can be worth the extra time and effort. This proves to a seller that you can get a loan. Sellers want the process to go as smoothly as possible, and preapproval offers an extra layer of reassurance.
Who Should Get Prequalified for a Mortgage?
Getting prequalified for a mortgage may be especially helpful for you if you haven’t purchased a house before and have no idea how much you can afford to pay. It gives you a ballpark range of how much you can spend.
Who Should Get Preapproved for a Mortgage?
For most prospective home buyers, getting preapproved for a mortgage will be more advantageous than getting prequalified. This tells the seller you are ready to buy. It can also give you a leg up on a rival bidder who has only been prequalified. It can also alert you to any issues with your creedit score or financial situation ahead of time.
Preapproval takes a load off your shoulders, too. You aren’t guaranteed to be approved for your loan — that will depend on the property’s appraisal — but it starts you down the road to approval, and it’s one less thing to worry about during homebuying.
When Should I Get Prequalified for a Loan?
If you’re just now starting to consider buying a home, you should get prequalified for a loan. Usually, your financial institution can give you a prequalification letter within a day or two. Having this will help you and your realtor get a better idea of the price range you can afford.
When Should I Get Preapproved for a Loan?
Ideally, you should get preapproved for a loan when you become very serious about buying a house. It can take longer to receive preapproval, sometimes up to a week or more. Getting preapproved will give you a better idea of your interest rate and how much your monthly mortgage payment would be for a property. You want this letter as soon as possible, so tackle this process immediately when you begin to look at homes and be sure to promptly answer your potential lender’s requests for additional information or paperwork. You don’t want to miss out on the perfect home because your preapproval was delayed.
Get More Information on Home Financing
Now that you understand the difference between prequalification and preapproval, you may want to learn more about financing your new home. Check out PSECU’s low mortgage rates to see what types of loans you can get, and find more money management tips and resources on our WalletWorks page.