Are you starting the homebuying process, but you aren’t sure about the difference between preapproval and prequalification? Have you received a preapproval letter and want to know what to do now?
If this sounds like you or someone you know, it is important that you learn the differences between the two terms. While preapproval and prequalification may sound and look similar, their definition can vary based on your lender.
Navigating the homebuying process on your own can be difficult, and that is why we are here to help you out. This article will go over the difference between a preapproval and a prequalification, and who you can contact to get approved now.
Many customers believe that preapproval and prequalification notices are the same things, but that is not true. It is important to note that mortgage companies use these terms interchangeably, which can make it difficult to see the difference between a preapproval and a prequalification. Make sure to ask your lender for clarification.
Prequalification is usually the first step when you are applying for a loan. In this step, your lender will let you know that you qualify for a mortgage loan, but you won’t receive a complete picture of what you are approved for.
Prequalification is not dependent on your credit. It is a guestimate based on the factors you entered on the lender’s website.
A prequalification is excellent, so you can know how financially ready you are to take on a mortgage. Prequalification is a good step for those starting their home buying process and seeing what they may qualify for.
A preapproval is more official than a prequalification. Your mortgage lender will look at your credit score, assets, and your income to determine how much your loan will be.
Your lender will also tell you what your interest rate will be based on your income and other factors. Once you receive your preapproval letter, you can then reach out to your real estate agent to help you find your perfect home.
Why Are Approvals Necessary?
It is vital to receive approval from a mortgage lender because it shows that you are financially ready to take on those mortgage payments. A mortgage approval also lets sellers know that you can afford the house that they are selling.
It is not ideal to start shopping for homes and making offers if you only have a prequalification notice. Your prequalification notice does not contain any set terms or a set loan amount.
How Long Does a Preapproval Take?
A preapproval tends to take a bit longer than a prequalification because of the information that you will need to provide to the lender.
For example, your lender will need to pull your credit report and verify your income and assets to be approved. Depending on how available that information is, your mortgage lender can give you your approval within about ten days.
How Long Does a Prequalification Take?
Prequalification results can be faster than the results from a preapproval because they do not require a lot of information. Your lender will most likely do a soft pull on your credit and ask you to input an estimate of your income.
Once they have that information, they can provide you a prequalification based on what was provided within an hour.
The time frame of when you will receive your prequalification depends on your lender and how you applied. If your lender has an online application, they might be able to get back to you faster than those who take paper applications.
When to Apply for Preapproval
Timing is of the essence when you are looking to purchase a home. It is recommended that you apply for a preapprovalwhen you are actively looking to buy a home.
Depending on your lender, there is a short window for now long your preapproval will be valid. If you aren’t sure if you are planning to buy a house within a month, it is better to prequalify.
A prequalification is good for getting a ballpark idea of what you could be approved for, so it is great to do this instead of a preapproval if you want to purchase a home within a month or two.
As mentioned above, a preapproval does have a short window of time before they expire. The main reason why they have these time frames is because your financial status can drastically change within a few months.
Lenders only will extend approvals for about three months, because most prospective clients fall through after the third-month mark. If your preapproval expires, you will have to apply again to receive a new approval letter.
Preapproval Negotiation Power
Although a prequalification letter will help you understand your future budget, it is always best to use your preapproval for better negotiation power. A preapproval lets sellers know that you are more likely to close on the house without any problems.
If you need or want any improvements or repairs included in the home purchase, your preapproval letter will come in handy. The seller will be more willing to give you what you are asking for because you can show what you can afford.
Get Approved Today
Figuring out the difference between preapproval and prequalification can be confusing, especially if you do not partner with the right mortgage lender. Making sure that your questions and your needs are met should be your lender’s top priority.
Contact us now if you are looking to determine what you prequalify for or how much you can be approved for a mortgage loan. We also specialize in second home mortgages and other crucial residential mortgage services. Our team is available to take your questions today.
Two Steps Ahead… Get Committed ®
At Compass Mortgage, we offer something that goes much further than a prequalification or preapproval. With the Get Committed program, you can process your loan before you find a property. This is very different from a normal preapproval/prequalification … it allows an offer to be backed by a loan commitment.
A loan commitment means a loan has gone through underwriting, and the paperwork on a loan is complete. This matters to a seller as it’s not unusual for a buyer to run into problems when going through the loan process that could cause the offer to fall through or cause a delay—this is a seller’s fear.
With a loan commitment, you have already addressed any of those problems or delays, so you can show a seller that the funds are secure and ready to go. It acts like a cash offer and can significantly speed up closing.
The Get Committed program helps your offer stand out in multiple bid scenarios. To learn more about this program, click here!