“Before anything else, preparation is the key to success.”
Telephone inventor Alexander Graham Bell once said this, and though we can’t confirm or deny this quote is about homebuying, it definitely applies to the mortgage application process. And one of the best ways to successfully prepare for homeownership is to get a prequalification or preapproval. Though they share the same prefix, the differences between getting preapproved and prequalified are pretty significant and these terms shouldn’t be used interchangeably.
How so? Allow us to break down both options and find out which is right for your situation.
The scoop on a prequalification
Getting prequalified is one of the first steps in the mortgage process, and it’s also one of the easiest. Basically, a prequalification gives you an estimate of how much you may qualify to borrow, issued by a lender. You provide the lender with your income, assets, debt (via phone or online) and then your credit score checked, they review it, and then give you an estimated home loan amount for which you may be qualified to borrow.
Keep in mind, in a prequalification, the lender relies on you to provide accurate information, so nothing is etched in stone at this stage. Since it’s subject to change, getting prequalified is not as formal as a preapproval for a home loan, which is a much more thorough process.
Bottom line: A prequalification is likely the better option when you’re really only considering buying a home, and want a ballpark idea of what you’ll be able to qualify for.
The scoop on a preapproval
A preapproval is the more accurate and detailed option of the two. Here you provide physical documentation of your income and assets for verification purposes, including your credit report. Unlike a prequalification, your preapproval letter is reviewed by an underwriter. They’ll verify the documentation and determine whether you’re eligible for a loan and how much you’re qualified to borrow. And just like that, you could be conditionally approved for a loan.
Why does a preapproval hold more weight?
Both options should be considered before you begin your home search, as each gives you a sense of how much house you can afford. With that said, if you’re committed to buying a home in the very near future, getting a preapproval for a home loan is probably the more beneficial choice. Here’s why:
- It helps you narrow your home search by showing you what you can afford
- It shows sellers you’re committed and equipped to buy
- It gives you an edge over other prospective buyers who are not preapproved
- It instills confidence in you, knowing you have purchase power.
By now, the differences between preapproved and prequalified should be cleared up. However, they do have one thing in common: both can propel you to the purchase of a home, and give you a whole lot of confidence along the way.
Have you made the decision to become a homeowner? Great! Get familiar with our preapproval process here.