If you’ve made the decision to buy a home, it is important to have a prequalification or preapproval letter from your lender before you begin the process. Often, home sellers are requiring one of these documents before they’ll even show you their home.
In a competitive home buying environment, you’ll find that being prepared will give you an advantage, as it lets sellers know you’re serious. So, what’s the difference between a loan prequalification and a preapproval?
A loan prequalification is one of the first steps in estimating how much money you may be able to borrow. You’ll need to create an overall picture of what you can afford by discussing your income, savings and credit history with a lender. This is more of an informal process that relies on the information you supply, and it will not be checked.
You’ll want to be completely transparent because you don’t want to create a bad relationship with your lender—they are determining what kind of risk you are. You also don’t want to be disappointed later, when it comes down to final approval.
A loan preapproval is more thorough than a prequalification. At this point in the process, you’ll complete a loan application, and the information you provided during prequalification will be verified. Your lender will also run a credit check.
The mortgage loan preapproval will give you the type of loan you will qualify for, as well as a defined borrowing amount. This will put you in the right direction when considering homes to purchase.
It is important to remember that neither of these documents guarantee you a loan, and it is not a commitment with your lender. The last step in the process is the final loan approval which is contingent upon appraisals, inspections, and compliance of loan conditions.
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