Prequalification, preapproval, and loan commitment are important terms in the homebuying process that represent three distinct steps.
We’ll guide you through each step, explaining their role in the mortgage process, which steps are most essential, and when they’re performed.
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Step 1: Prequalification
The terms “prequalification” and “preapproval” are often confused or used interchangeably, but they are two very different steps.
Out of all the steps, prequalification is the least formal, and could even be left out of the process if a potential buyer wanted to skip ahead to preapproval.
However, this step can be valuable for those who are just beginning to think about the homebuying process and want to learn more information about what’s required and what they can afford.
The reason this step is so informal is because the information you provide to a lender about your finances is not verified.
Instead, whether through an online questionnaire or a phone call with a lender, they’ll ask you about the following:
- Income information
- Bank account information
- Credit check
Since they aren’t verifying this information with your pay stubs, tax information, or actual bank statements, the information instead is used as a guideline.
Based on the information you provide, the lender will tell you how much they potentially could offer you.
Prequalification can also help with comparison shopping for lenders, since you’ll have a loose idea of what a specific lender is willing to offer you.
From there, you will gain a basic idea of what you might be able to borrow for a home, and could begin house hunting.
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Step 2: Preapproval
Preapproval is a helpful step in the homebuying process for several reasons:
- Proves to real estate agents and sellers that you’re a serious buyer
- Gain a true understanding of how much you will be able to borrow from a lender, based on verified income and tax information
- Can make an offer on a home with confidence
- Helps you stand out from other buyers with a preapproval letter
Ideally, a buyer will apply for preapproval at the start of the homebuying process, but it at least should happen before they make an offer on a home.
To get preapproved, you’ll connect with a lender or multiple lenders and fill out a mortgage application.
You’ll need to provide the following information:
- Recent pay stubs
- Bank statements
- Asset statements
- Down payment amount and ideal mortgage amount
- W-2 statements and tax returns
The lender will also need to run a full credit check, and may ask for more statements and documents as proof that you can repay your loan.
Once you are preapproved, your lender will give you a preapproval letter that you can take to your real estate agent and include in the offer you present to a seller.
Many experts attest to how essential a preapproval letter is to make your offer competitive — especially when the market is hot.
Step 3: Loan commitment
Once an offer has been made on a home and the seller accepts, the lender will provide a loan commitment letter.
This letter is a promise to provide funding for the home purchase — as long as certain conditions are met.
These conditions, unlike a prequalification or preapproval, are based on both a borrower and the property they wish to purchase.
Conditions typically include:
- Submitting all necessary documents
- Completed and satisfactory home appraisal
- Proof of title
- Proof of insurance
- Final underwriting, including a buyer finance recheck
Until the loan closes, the lender will be making sure your finances and credit remain the same.
The loan commitment letter details the loan amount, the type of mortgage, the rates and terms, and an expiration date.
If everything checks out, you can move forward to final approval and closing on the loan.
Why is a mortgage commitment letter important?
The mortgage commitment letter confirms that you’re approved for your loan.
A conditional letter will detail exactly what you need to get your loan, while the final letter proves you’ve completed all necessary steps and can move forward to close.
Prequalification and preapproval are important steps in the process to get you to this point, but your loan commitment marks how close you are to stepping into your new home.
This letter also shows the seller that you’ve completed all your necessary steps and are truly committed to the purchase.
Does a loan commitment letter mean I’m approved?
If you have conditions to fulfill on your loan commitment letter, the lender will usually state that you have been approved, but approval is subject to certain conditions.
Once these conditions have been fulfilled, you essentially have the lender’s promise that they will fund your purchase as long as nothing changes between then and closing.
The general rule for buyers is to steer clear of any employment changes, missed payments, or large purchases while you are moving through the mortgage process.
How do I get a commitment letter?
Buyers receive their commitment letter once they’ve met all the lender’s requirements.
This includes completing your mortgage application, supplying all documentation, answering all requests for further information, and completing a successful appraisal.
These steps allow the lender to complete the underwriting process, which will ultimately lead to your final commitment letter and loan approval.
Apply for a loan today with Compass Mortgage
If you’re ready to get started with the homebuying process, apply now for a mortgage with the experienced lenders at Compass Mortgage.
Better yet, talk to one of our loan officers about Get Committed®, our unique program for a loan commitment which goes beyond preapproval to help you buy the home of your dreams.
We promise an unmatched lending experience, led by our strong work ethic and respect for every person we meet.
We can’t wait to help you get into your dream home!
Photo by Sebastian Herrmann on Unsplash