Preapproved vs. Prequalified?


Congratulations on your decision to purchase a home!

You may have started looking at homes online or picked up flyers as you drove around a neighborhood. As fun as it would be to call your local REALTOR® to take you around to look at homes, there is an important step that will help your home buying process run smoothly.

Take the time to get preapproved with a local mortgage lender or broker.

It does not take a lot of time to fill out a mortgage application. It can usually be done online in the comfort of your home. You will still have to provide paperwork to the mortgage lender or broker but you can start the process at any time.

Once your information has been verified, you will be given an amount that you are preapproved for, along with an estimate of closing costs, prepaid amounts and a monthly mortgage payment.

What is the difference between being prequalified and preapproved?

A prequalification is a quick and easy step. This can be done over the telephone with only a general financial snapshot given. No documentation is provided to the mortgage lender or broker so the amounts given are only an estimate of what to expect.

A preapproval is a longer process.
A loan application is filled out and an extensive check of your credit worthiness and financial background is reviewed. Documentation such as tax returns, credit report, bank statements and sources of income are reviewed. The mortgage lender or broker has your specific financial information so a decision can be made as to whether you could conditionally qualify to purchase a home or not at this time.

When you meet with your REALTOR®, you want to be preapproved so that you have an idea of not only the price range for potential homes, but also what the expected monthly mortgage payment will be for that price range. Even though you might qualify up to a certain dollar amount, you may not be comfortable with the monthly mortgage payment that goes along with that preapproval amount. And that is okay! Having a realistic monthly home budget helps in deciding the initial price range of homes to look at.

Your new home mortgage will include principle, interest, property insurance and property taxes.
Sometimes, buyers look at the estimated monthly payment and do not take into account the other costs associated with owning a home. Other amounts to consider when planning a monthly home budget would be if there is an active homeowner’s association with dues, utility costs, possible cable and internet fees, possible yard, snow removal and future home maintenance. All of these amounts add up. If you are not budgeting for these amounts as you are looking at potential homes, you could end up paying a lot more a month than you had originally planned on.

After looking at homes with your REALTOR®, you found the perfect place.
Now it is time to sit down to come up with a negotiation plan and write an offer. A preapproval letter signed by your lender will be submitted with your offer. The preapproval letter strengthens your offer since it reflects to the seller your true ability to purchase the home with a conditional mortgage approval. If there are multiple offers, by being preapproved it could save the seller time compared to another buyer that has not started the mortgage process yet.

Closing costs are another important part of your offer. Depending on the loan program that you qualify for, there are specific requirements on whether a buyer or seller can pay for certain closing costs. By getting preapproved, the offer has been written to align with the correct loan program so that there should be minimal changes required throughout the process.

If you are requiring closing costs assistance – where you are going to ask the seller to pay for some or all of your closing costs – the estimate with your preapproval is very important. If you ask for the seller to cover too much money, you do not get the difference back. If you ask for too little to be covered, you could have to bring money to closing to cover the amount that is still outstanding.

The loan process is not completely approved until the end when an underwriter has reviewed all of the final documentation. This will include all of your original paperwork, along with all of the documentation that has been compiled along the way. A loan is not completely 100 percent approved until an underwriter has signed off on it.

Even though buying a home can be an exciting and stressful process, taking the steps to get preapproved right away in the beginning could save you time and needless hassles. Work with local professionals that you are comfortable with and you can trust. You should feel that you are working with people that truly have your best interests in mind. Ask many questions along the way so that you feel knowledgeable with the process. The home buying process is all about you and meeting your specific needs.

Happy House Hunting!

Published March 30, 2017 in Echo News: