MAR 28, 2023
If you're in the market for a new home, you may have heard the terms "preapproval" and "prequalification" thrown around. While they sound similar, they actually have different meanings and implications when it comes to buying real estate.
Prequalification is an estimate of how much you can afford to borrow based on your income, assets, and debts. Prequalification is usually done online or over the phone and doesn't involve a thorough review of your financial documents.
Prequalification doesn't guarantee that you'll be approved for a loan, but it can give you an idea of what you can afford.
When you get preapproved for a mortgage, the lender will review your financial documents, such as your bank statements, pay stubs, and tax returns. The lender will also check your credit score to see how creditworthy you are.
Once the lender has reviewed your financial documents, they'll give you a preapproval letter. This letter will state the loan amount you're preapproved for and the terms of the loan. With a preapproval letter in hand, you can make a more competitive offer on a home because the seller knows that you have already been approved for a loan up to a certain amount.
The main difference between prequalification and preapproval is the level of scrutiny that your finances undergo. Prequalification is a quick estimate based on the information you provide, while preapproval requires a thorough review of your financial documents.
When you're preapproved for a mortgage, you can be more confident in your ability to buy a home because you already have a lender's commitment to lend you the money you need.
If you're just starting your home search and want to get an idea of what you can afford, prequalification can be a good first step. However, if you're serious about buying a home and want to make a strong offer, preapproval is the way to go. Preapproval shows the seller that you're a serious buyer and can also give you more bargaining power when it comes to negotiating the terms of the sale.
This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.