Difference between pre-qualified and pre-approved
The difference between pre-qualified and pre-approved When you start contacting lenders for mortgages you will start to hear them talk about “preapproved” and “prequalified” and this can start to get confusing because although they sound similar, they are two quite different things.
To help you cut through some of the home buying jargon, we have put together some of the key differences so you can understand the processes that lenders use when establishing your suitability for a home loan.
Getting Approved for a Home Loan
This is usually the first step and involves providing the lender with a lot of basic financial information similar to that used for any kind of finance like credit cards or personal loans.
The lender will perform a ‘soft inquiry’ against your credit record which will not impact your credit score. It will not constitute a firm offer but it can indicate whether an application for a mortgage loan is likely to succeed and how much you may be able to borrow. This can ultimately save a lot of wasted time.
This is a slower process because the lender will want to take an in-depth look at all your finances and other information that will give them an indication of your prospects as a home loan customer. They will take a look at your credit history and report and then give you a more accurate idea of the size of the loan you could receive.
The main differences:
With prequalification, the lender checks the information you provide; with preapproval, they will verify the information and say whether or not they would be prepared to underwrite your loan without actually committing the mortgage itself. These checks are similar to those used for credit cards, personal loans, and other forms of finance.
I am Prequalified – what does that mean?
It means that you have taken the first step towards getting your home buyer loan. If you have sent off all the information about your income, debts, finances, and other assets and an idea of the area and type of property you want, the lender can give you an estimate of the size of the loan you could obtain.
You can usually just phone up and give them the information although some lenders like to receive it in email form. At this stage the lender will not verify the information – this is part of the preapproval process which comes later.
Although a prequalification letter is useful for narrowing your field of search according to your financial means, the lender hasn’t verified anything so it could change at a later stage.
What will Preapproval mean for me?
When you submit your information to a lender for preapproval they will conduct a much deeper investigation into your finances. The lender will look at the proof of income and any documents relevant to financial assets, they will look at your credit report, your payment history, and other factors before sending you the preapproval letter.
If the lender decides that you do meet their requirements they usually send a pre-approval letter within a few days. The letter is only valid for 3 months (90 days) so you will need to do it again if you have not established a loan before then. The letter will indicate the sort of interest rates you will be expected to pay and how much loan you can apply for.
Whatever the preapproval letter says in terms of budget try to avoid spending the maximum – you need to be realistic in what you can afford to pay each month. Your preapproval letter can further narrow your property search and you can use it to show sellers you are serious; they often feel more confident with buyers who have preapproval for a mortgage. It may encourage them to choose your offer over that from other buyers.
In a nutshell:
- A quick assessment of your finances
- Buyer provides the financial information
- May be supplied online or verbally
- The loan amount can change at preapproval
- In-depth assessment of your financial standing
- Documentation is required and checked and will include all credit, income, and debt information
- The loan amount provided by the lender is more accurate
I’ve been preapproved for a mortgage – what now?
Once you have received your preapproval letter you can start actively looking for a home if you haven’t already begun. Once you have found a property, made an offer, and had it accepted by the seller, you need to finalize your home loan application. Your lender will probably ask for some additional documents and then the mortgage will move forward. Processing is the next stage, followed by underwriting.
This represents the final stage of a home loan when all your financial and other information are verified and compared to the eligibility criteria that the lender uses when awarding home loans. If everything goes through smoothly you could be looking at a closing date in under a month.
Once you have your preapproval you will need to keep tight control of your finances. Make sure you do not miss any payments and pay all bills on time. Avoid taking on any additional debt or making major changes in employment during this time. All of these factors could put your final approval at risk.
Preapproval and prequalification sound the same but are different parts of the home loan approval process. It is important to remember that both steps are important. Even though prequalification is not a commitment from the lender to approve you for your home loan it is a good way of looking at your options and narrowing your home search.
Another plus is that it is usually free so there’s no good reason not to get this done. It is preapproval that gives you a more concrete idea of what you can afford to buy and how much the mortgage lender is likely to lend you. However, you will still need to keep on top of your finances until the final validation and approval of the loan has been completed.