Before you get any further in the home buying process, you must first obtain your preapproval from a mortgage lender. But what exactly is a preapproval?
A preapproval is a written acknowledgement from a lender that states you are qualified to obtain a home loan for the amount requested. But what many buyers may not understand is there is a real difference between a prequalification and a preapproval. The terms are not interchangeable.
A prequalification may be nothing more than a conversation with a loan officer regarding income, credit and money in the bank. That’s certainly fine in the early stages when you may be simply curious about the mortgage process when you get referred to a loan officer to talk about home loans. The loan officer will consider your income, current interest rates and the amount of funds you have available for a down payment plus closing costs while giving you a range of what you might qualify for.
But nothing is verified with a prequalification. It’s simply a conversation between you and a loan officer. A preapproval takes the extra steps. A loan officer will first ask you to complete a loan application. Once completed and submitted to the loan officer, a credit report will be pulled and reviewed. You will supply your pay check stubs, your W2 forms and perhaps your income tax returns along with recent copies of your bank statements.
A preapproval essentially means the only step you have left in the mortgage process is finding a property. Do you think the owner of a home that you want to buy wants to know if you’re serious about buying a home? If you don’t have a preapproval letter from your lender much less completed a loan application, what do you think the seller will do when presented with two offers—one with a preapproval letter and one without?
The preapproval makes the shopping process much easier without concerns of whether or not you can qualify for a loan. As those in the lending industry say, “Know before you go!”