Mortgage Pre-Approval VS. Pre-Qualification Letter
If you've been considering purchasing a home you may have heard the terms "preapproval" and "prequalification". You may also not understand the differences between the two.
Prequalification is less formal and usually something that can be done without writing any credit reports or background checks. A prequalification is basically an estimate of your borrowing power. By determining how much you make and how much goes out every month, you can see a blanket idea of about how much you can afford in a home mortgage.
A preapproval is a much more formal process in which a lender actually take some of that information and plugs it into the system in order to get an exact amount that you could be pre-approved for should you not make any major financial mistakes between the time you apply and the time the property closes.
So why should you get a preapproval?
We always recommend our clients get a preapproval letter before looking at any properties. This means your far closer to receiving the mortgage that you're looking for when the time comes. If you're just prequalified, anything can change and if you mistakenly gave some information that's incorrect, it can alter the actual pre-approval process.
Having a preapproval letter in hand means you can feel comfortable looking at homes and because you've already done the financial homework necessary to get the ball rolling, sellers can feel more comfortable accepting your offer.
However, neither one is without any change. Things can change between the time a borrower applies for the loan and when the property actually closes. If major financial mistakes are made such as job loss, taking on too much credit, making a large purchase or other financial mistakes such as nonpayment of vital monthly payments, it can drastically change the approval process.
It is imperative that once you apply for a home loan you don’t make any major financial changes in your status.
So while prequalification is as easy as punching in some numbers on an online calculator, the preapproval process is much more in-depth and will really get the ball rolling more seriously on your next home purchase.