When it comes to buying a new home, two key terms are tossed around within the aspect of mortgage approval. One of the first questions you are likely to encounter when making inquiries about homes or seeking an agent is, “Are you prequalified or have a preapproval on a home loan?”
While they sound the same, these terms actually hold two very distinct meanings that play a pivotal role during the course of mortgage approval and the home buying process. Essentially, prequalification and preapproval are steps taken by serious buyers to help determine how much home they can afford and how much of a home loan they can realistically obtain. Let’s get into details.
Understanding Mortgage Pre-qualification
When you first call the bank or similar institution inquiring about a home loan, someone will take some basic information about you and your finances. They’ll do some calculations and make a determination about how much of a loan you might qualify for should you proceed with the process.
This gives you (and lenders) a ballpark estimate of how much home you can really afford. However, it’s important to understand that the agent that you speak to will typically not run a credit report or verify your information. Rather, their estimate will be based solely on the information you provide.
That being said, it’s highly recommended to give the prequalification representative the most accurate financial picture that you can. You should receive a letter of prequalification to show agents or sellers to show you’re serious, but getting an official loan preapproval gives you more buying power.
The Power of Pre–approval for a Home Loan
Getting preapporved for a loan goes deeper in the confirmation and verification of your credentials than prequalification does. To get an official mortgage preapproval, the lender you inquire with will go in-depth into exploring your credit report, rental history and other pertinent information. These steps will be performed again should you pursue a formal mortgage approval down the line.
This makes a final estimation of your financial situation and your specific ability to make timely payments and how much they can be to fit the guidelines for the loan you seek. This information lets agents know what price range of homes to show you. Additionally, being preapproved for a mortgage amount allows sellers and their agents to understand that they are dealing with a serious buyer who is actually qualified and approved for financing.
Getting Pre-approved for a Home Loan
Each lender has a specific protocol, but in general, the steps remain the same. Borrowers provide the mortgage approval department with a lot of documents such as:
- Recent pay stubs
- Credit check authorization form
- Formal application
- Two months of recent bank statements
- Copies of latest tax return and W-2s
After evaluating all the documentation, if they deem you credit worthy the lender will offer you a preapproval letter detailing the loan amount, plausible interest rates and other pertinent details about the offer. These are typically considered valid for 90 days, after which your status may need reevaluating.
Tips for Improving Mortgage Pre-approval Odds
Increase your chances of pre-approval for a home loan by:
- Checking your credit regularly and correcting any mistakes
- Avoid applying for any new lines of credit
- Pay down existing loans and credit lines
- Be current on income and state taxes
- Pay bills on time
- Maintain steady income and boost it if needed to qualify
- Ask your current landlord if he/she reports monthly to credit bureaus showing timely payments.
These are all things that lenders are looking for when evaluating your credit worthiness for a large loan.
Are You Ready to Buy a Home?
If so, give getting prequalified and pre-approved serious consideration to boost your chances of locking in a good interest rate and increasing your chances of landing the home of your dreams.