When you start searching for a home, your real estate broker may ask you about potential financing options. Before you start discussing your financing, there are some terms you should be aware of. It is important to understand these terms could be used interchangeably but they are very different. These terms are prequalifying, qualifying or preapproval. Here’s what each of these terms mean for you as a home shopper.
What does prequalifying mean?
If you are considering getting prequalified before shopping for a home, you will provide to a mortgage lender or broker certain information. This information will include your monthly income, monthly credit card expenses, and information about other bills such as a car payment, or insurance which are paid on a monthly basis. Your mortgage lender or broker will ask you specific questions regarding your credit including whether or not you have had any late payments during the last 12 – 24 months. None of this information will be verified by your broker or lender.
Once your mortgage professional has obtained this information, they will help you determine how much of a mortgage you may be qualified to obtain towards purchasing your new home. This information is helpful because it will give you the flexibility of knowing approximately the price range at which you can purchase your home.
What does preapproval/qualifying mean?
While preapproval and prequalifying often are confused as the same process, there are very significant differences. During the preapproval phase, a lender will have you fill out a mortgage application, run a credit report, and verify the information they request from you. This process allows you to know how much money you actually can get approved for, versus an estimate of how much of a mortgage you qualify for.
In most cases, a lender will issue you a preapproval letter with certain caveats including that information provided on your initial application does not materially change between the preapproval or qualifying process. For example, if you maxed out a credit card which had a zero balance when you applied, that could impact your final qualifying. The same is true if you missed payments, changed jobs, or other financial circumstances which materially changes your initial application.
The advantage of a preapproval when shopping for a home is clear: When you are negotiating with a seller, you know exactly how much of a loan you will be eligible for, and you also know that unless something materially changes, you will be approved for that loan.
What happens after prequalification?
Once you obtain a prequalification, you can start searching for your home with the confidence that you know what range you can qualify for a mortgage. Once you identify your dream home, you will fill out a mortgage application, provide documents to your lender, and your credit will be checked. Assuming there are no material changes from the original information you provided to the lender, you may then receive a mortgage approval.
What happens after preapproval?
Preapprovals will significantly shorten your process of finalizing your home purchase. Your mortgage lender will verify your pay for the period between your original preapproval, ask you about any changes in your finances, and pull your credit report again to make sure there are no material changes since the preapproval. Assuming there are no material changes, your mortgage will be ready for the final step.
The homebuying process is exciting and you will likely hear several terms you are unfamiliar with. Never hesitate to ask questions of your realtor or your mortgage professional during this process so you understand what steps to take next.