Preapproval Letter vs. Prequalification For Home Loan
The terms prequalified and preapproved go hand-in-hand with buying a home, but what do they mean? They are often used interchangeably, so how are they different?
Prequalification vs. Preapproval
A prequalification is basically an estimate of your ability to borrow money. By supplying a bank or lender with your overall financial standings, they are able to evaluate your finances and give you an idea of the mortgage amount that you may qualify for. This is considered one of the first steps to becoming more serious about shopping for a home.
A preapproval is a much more comprehensive process that includes completing an official mortgage application, along with providing any documentation required by the lender to complete an extensive financial background check.
During this process, the lender will be able to determine the exact amount for which you are approved for a mortgage, which gives you an even more realistic view of what you can afford.
When you're preapproved, the lender writes a preapproval letter on your behalf, stating that they've reviewed your finances and are willing to loan you a specific amount of money to buy a house when you are ready. This letter is usually valid for 60-90 days and can be updated by verifying some of the documents again.
Before most Real Estate Agents will show you homes, they will ask you to provide them with a copy of your preapproval letter from your lender. Based on the amount the lender is willing to lend you, the Agent can make sure you are hunting for homes in the proper price range for your budget and can better prepare you for what to expect in the local market. Having a preapproval letter also signals to your Agent that you are serious about purchasing a home.
When you're ready to make an offer, your Agent will submit a copy of your preapproval letter with your purchase offer to the Listing Agent of your desired home. The Listing Agent will pass it along to the seller to help them decide whether or not to accept your offer.
If you are not quite ready to take the step towards prequalification or preapproval, that's okay! Simply try our free True Affordability Tool to get a great estimate on how much home you can truly afford based on your personal situation.
Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.
