Mortgage 101: Prequalified vs. Preapproved

This is an excerpt from our eBook, Which Mortgage is Best for You. Get the full eBook for FREE. Download here.

 

Whether you’ve made a big move, recently earned a promotion, or you’re getting ready for a new baby, there are plenty of reasons to buy a new home. Whatever your motivation for home ownership, it’s a big step. Not only do you have to find a home you like and that works for your family and your set of unique needs, you also have to find a way to pay for it. For most buyers, that means taking out a mortgage. And if you’ve been researching mortgages, you’ve probably come across the terms “prequalified” and “preapproved.” These terms sound similar and are often used as synonyms, but they are two different things. So what is the difference between the two? Should you be prequalified or preapproved?

 

The difference between “prequalified” and “preapproved”

As a first-time home buyer, you’re going to hear a lot of different terms during your home-buying experience. We understand that the terminology can feel overwhelming, and it’s easy to get some of them mixed up. Two likely terms to be confused are “prequalified” and “preapproved.”

 

What does it mean to be prequalified?

Being prequalified for a loan means you’ve talked to a lender about your income, debts and assets, and gotten an estimate of how much you can borrow based on that information. Prequalifying is worth doing if buying a home is still quite a way down the road for you. It will give you a general idea of where you might stand with lenders, but it doesn’t tell you whether you’ll get approved for a mortgage or how much you can borrow.

 

In order to get prequalified for a mortgage, you give your lender the information mentioned above- details on your income, debts and assets. The lender then takes this information and uses it to determine how much you will likely qualify for. In the prequalification stage, you don’t have to worry about anything having a negative impact on your credit score, there aren’t any fees associated with the prequalification process, and it’s a great option if you’re a first-time home buyer.

 

What does it mean to be preapproved?

If you’re preapproved for a loan, you’ve given the lender the same information as in the prequalification process, except now you’ll back that information up with documents. These documents could include pay stubs, a credit report, bank statements, and other documents. In this case, since your lender will be checking your credit, your should anticipate this causing a small dip in your credit score.

 

This is the stage in the home buying process when you’ll know exactly what you can afford, and it is a big step in helping you find the home that works best for you. It will also help you to close on your home loan faster, which is another major plus. The preapproval is a step you should take as soon as you’re serious about buying a home. Without preapproval, you don’t know what you can borrow, what kind of loan you’re eligible for, or if you can get a loan at all.

 

Once you’re preapproved, you’ll know what price range you can shop in for a home and what your interest rate and monthly payment will look like. Many sellers, and even some real estate agents, require buyers to be preapproved before they will accept a purchase offer or take them on as clients.

 

Should I get Prequalified or Preapproved for a Mortgage?

So now that you have a deeper understanding of the differences between being prequalified and preapproved, let’s talk about which option would work best for you. Ultimately, the choice is up to you. But there are a few things that you should consider.

 

The process to get prequalified for a mortgage is a fast process. The bank will take a very quick look at your finances and give you a general idea of what a home loan could possibly look like for you. While it’s certainly the fastest way to go, it’s not terribly in-depth and they can’t tell you anything that is solid. They can give you an estimate, and that’s about it. So if you’re in the beginning stages of the home buying process and you want a general idea of what your budget is, this is a good way to go.

 

On the other hand, getting a preapproved loan is a much more in-depth and rigorous process. Between the credit check, the financial document submissions and the mortgage application, this is the more detailed and lengthy way to go. This process will also generally cost money and comes with a credit check. This is a good route for those who are deeper in the home loan process and are serious about moving forward.

 

So as you embark on your journey of becoming a homeowner, take some time to consider which process works best for you based on where you currently stand. Whether you’re leaning toward being prequalified or preapproved, both are steps in the home buying process that can make a significant difference for you. Looking for the best place to get preapproved for a mortgage? Connect with a MACU team member today!