Ready to buy your first home? After estimating how much you can comfortably afford to spend, you will likely need to get prequalified or preapproved for a loan before you can start putting in offers.
But how do you decide if you should get prequalified or preapproved, and what does that mean, anyway? Here are a few ways to decide the best option for you, plus the basic steps you’ll need to take and how to turn your prequalification or preapproval into a mortgage.
The Difference Between Prequalified and Preapproved
Some lenders use prequalified and preapproved interchangeably, or they create their own term. What’s important is not the name, but the process and outcome of your application.
Generally, getting prequalified means you give a lender basic information—online or over the phone—about your income, debt, and assets available for a down payment, and the lender gives you a letter with a ballpark estimate of how much you can borrow, usually within minutes. The downside is that it won’t carry much weight with sellers when you’re making offers.
In hot real estate markets where you are competing with multiple bidders, you will need what most lenders call a preapproval letter. When you apply, a loan officer will review your credit reports and scores, W-2 forms, tax returns, pay stubs, bank statements, and other documents to assess your financial standing. Generally, somewhere between five and 10 business days later, they will issue a letter stating how much you may be able to borrow, subject to various conditions. If your preapproval is rejected, you will be notified and given a letter that details the reasons for the refusal, says Ann Thompson, Bank of America’s consumer lending executive for the West.
After getting preapproved, the lender might go a step further and submit your application to underwriters, the people who verify your information and have final say on loan approvals. “They check all the smaller details [that might] throw up any red flags,” says Melissa Brauer, an agent with West USA Realty in Phoenix. A preapproval that is underwritten or credit approved generally means the underwriter has endorsed the borrower, but the loan is still contingent on a signed purchase contract, appraisal, title report, home insurance, and final employment check. It’s the next best thing to a cash offer, but not all lenders will send your application to underwriting until you have identified a property or had an offer accepted.
Smart Tip: Lenders don’t usually charge for approvals, but it’s best to ask before beginning the process.
Why You May Want to Get Preapproved for a Mortgage
You may need a preapproval letter to be taken seriously by sellers and their agents. Seasoned real estate agents might not even show you homes until you’ve taken this step, says Duncan Robertson, a loan officer with Fairway Independent Mortgage Corp. in Phoenix.
Getting preapproved will also let you know if you’re eligible for any programs offering down-payment or closing-cost assistance, Bank of America’s Thompson says.