March 1, 2024 • 8 mins
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If you are planning to buy a home, you have likely heard the terms prequalification and preapproval. And while these terms are often used interchangeably, there are some key differences that matter when it comes to buying.
These are both two optional steps you can take to start the loan approval process and get an estimate of how much you can borrow from a lender. But what are the differences between them, and which one should you do first? Typically, buyers will undergo prequalification first and then preapproval.
Prequalification is a simple, quick process that provides a general indication of whether you would qualify for a mortgage. To get prequalified, you just need to provide some basic information about your income, assets, credit, and debt to the lender. The lender will then give you an estimate of the loan amount, types of loan programs and interest rate you may qualify for, based on the information you provided. Prequalification does not require a credit check or any documentation, so it does not affect your credit score or guarantee you a loan.
Prequalification is a good way to start your homebuying journey, especially if you are not sure what homes you can afford or what loan options are available to you. It can also help you prepare for the preapproval process by giving you an idea of what lenders will look for and what you need to improve on your financial profile.
Getting prequalified will not impact your credit because it will not result in a hard credit check. You can get prequalified several times without it showing up on your credit report.
Before you work with a lender, ask them if they’re going to run a credit check. That will determine whether or not you are getting prequalified or preapproved.
Because prequalification does not come with a specific offer from a lender, there is no set time frame. Getting prequalified is a fairly quick process and you should find out within a day or so if you’re prequalified.
Just remember, prequalification also depends on the information you provide to the lender. If anything changes for the worse, then your prequalification status may no longer be accurate.
Preapproval is a more formal and comprehensive process that requires you to submit more documentation and undergo a full credit check. To get preapproved, you will need to fill out a mortgage application and provide documents such as your W-2s, pay stubs, bank statements, and tax returns. The lender will then verify the information you provided and run a credit check, which will show up as a hard inquiry on your credit report. The lender will then give you a preapproval letter, which is a conditional commitment to lend you a specific amount of money, as long as you meet certain conditions by the time you close on the home.
Preapproval is a stronger and more reliable indicator of your creditworthiness and your ability to secure a mortgage. It shows sellers and real estate agents that you are a serious and qualified buyer who can make a competitive offer on a home. It also gives you more confidence and clarity when shopping for a home, as you know exactly how much you can borrow and what your monthly payments will be. Preapproval can also speed up the loan process, as you have already submitted most of the required information to the lender.
Getting preapproved can impact your credit because a hard inquiry will appear on your report. Preapproval should only result in a slight drop in your credit score, and your score will recover in a few months.
The best way to avoid hurting your credit is to only get approval when you’re ready to buy a home. If you’re only casually looking, then you can hold off on getting preapproved.
The preapproval process can take a few days, especially if you are self-employed or have a complicated financial situation. If you need to get a cosigner, you will also have to provide their financial and personal information as well.
Once you are preapproved, that will be good for up to 90 days, depending on the lender. During that time, you can shop around for a home knowing that you are preapproved for a mortgage.
Prequalification is a good way to start your homebuying journey, especially if you are not sure what homes you can afford or what loan options are available to you. It can also help you prepare for the preapproval process by giving you an idea of what lenders will look for and what you need to improve on your financial profile.
The answer depends on your personal situation and your homebuying goals. If you are just starting to explore the market and want to get a rough idea of your borrowing power, prequalification may be enough. However, if you are ready to make an offer on a home or want to have an edge over other buyers, preapproval is the way to go. Preapproval can also help you avoid potential surprises or delays in the loan process, since those will already have to be addressed.
In any case, prequalification and preapproval are both optional and free steps you can take to prepare for your home purchase. They are not binding or final, and they do not guarantee you a loan. You will still need to complete the full loan application and underwriting process after you find a home and sign a purchase contract. The final loan approval will depend on the appraisal, title search, inspection, and other factors related to the property and the loan program you choose.
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