A prequalification is an informal estimate of how much house you can afford. Your lender uses the information you provide about your income, finances, and credit history to make an educated guess about your ability to buy a home. What is important to note is that a prequalification doesn’t require a credit report and is generally doesn’t provide you with any real credibility. A prequalification letter is mainly for shoppers in the early stage of the home buying process that want a basic idea about how much they can afford.
Getting a pre-approval for a mortgage loan is a different story. Pre-approvals carry a lot more weight and are a better indication of your ability to fully qualify for a mortgage loan. Lenders collect many documents during the pre-approval process including pay stubs, a credit report, bank statements, and tax documents.
After your lender has thoroughly reviewed your documents and verified all pertinent information, he or she will issue you a mortgage loan approval letter detailing a specific amount that you are pre-approved to borrow. Click here to speak with a licensed mortgage loan officer near you about the mortgage loan pre-approval process.
Pre-approvals have several advantages over prequalifications:
- Your Realtor knows your serious when you present a pre-approval letter – and will work even harder on your behalf!
- Sellers prefer to negotiate with prospective buyers with pre-approvals over simple prequalification letters – often times sellers won’t even consider your offer without a pre-approval letter from a licensed mortgage loan originator!
- Your mortgage pre-approval letter takes into consideration down payment percentages, interest rates, property taxes and mortgage insurance – which makes it clearer to you (the buyer) just how much you can truly afford to borrow.
- A solid pre-approval will help you get your loan processed faster. Getting a pre-approval could take you offer from a 60 day closing to as little as 30 days – with Inlanta’s express underwriting you may be able to close even faster!
All that said, a pre-approval letter is not a binding agreement between you and your lender. Let’s say you put in an offer on a house and begin the formal mortgage loan process. Your lender will order an appraisal on the house you intend to buy and the loan will be subject to the details of that appraisal. What if you lose your job, interest rates rise, or you run up your credit cards over the holidays? All these factors will affect your ability to afford the amount your were originally pre-approved for. (Stay tuned for a post on what not do when you are applying for a mortgage – here’s a hint – don’t buy a car.)
Pre-approval letters trump prequalification letters in almost all scenarios. If you are a serious shopper and want to carry more authority with sellers and real estate agents – click here to access our complete online loan application.
Loans are a lot like the law. It’s all about the documentation and proof. Like Jack McCoy (Law & Order) says, its not what you know but what you can prove. A prequalification is what you know. A pre-approval is the proof.