When you begin the process of purchasing a home, you may feel like you’re learning a whole new vocabulary. What does it mean to be prequalified for a mortgage? What about prequalified vs. preapproved — does that make any difference? And why does HGTV spend so much time talking about open concept kitchens, and so little time explaining mortgage terminology? Don’t despair! While the process might seem complicated, it’s not that hard to learn everything you need to know.
You’ll move on to the fun aspects of home ownership in no time, like choosing tiles for that show-stopping backsplash. But first, learn the difference between getting prequalified vs. preapproved for a mortgage loan.
Prequalified vs. Preapproved: Getting Prequalified Is Free & Relatively Fast
The first step to take when you’re looking to purchase a home is getting prequalified for a mortgage loan. A bank, credit union, or other mortgage lenders can handle the prequalification process for you. You (and your spouse, if applicable) need to give your lender some basic information, including:
- Total income
- Current debts
- Your assets
Lending institutions determine how big of a loan you qualify for by reviewing these numbers. It doesn’t cost anything to get prequalified for a mortgage, and the process is fairly quick. These days, you can even complete this step directly on your mobile device. However, getting prequalified is no guarantee you’ll receive a mortgage loan. So, be sure to ask your lender which type of mortgage loan usually works best for your circumstances.
Prequalified vs. Preapproved: Preapproval Requires Filling Out a Mortgage Application
When it comes to getting prequalified vs. preapproved for a mortgage, the preapproval process takes much more time and effort. You’ll complete an official mortgage application, pay a fee, and give the mortgage lender detailed documentation regarding your finances. In some cases, you’ll even hand over your bank statements. The lender will check your credit report, verify your employment status, and explain the interest rate on your home loan. At this time, you’ll also decide exactly how much you plan to fork over for a down payment.
According to The Motley Fool, the only significant difference between pre-approval and a completed mortgage application is choosing which property to buy. Once you’ve found the right home, there will be fewer surprises while securing your mortgage loan. That’s because you’ve already done most of the heavy lifting (pun intended — no lender’s going to help you get that couch through your new front door).
Though the preapproval process might feel long and involved, it sets you apart from other buyers who are merely prequalified. Sellers want to accept offers from buyers who are able to close on their timeline. If a bidding war happens between prequalified vs. preapproved prospective buyers, the latter usually wins because they’re ready to close.
Prequalified vs. Preapproved: Why Knowing the Difference Matters
Always get your financing ducks in a row, so to speak, before you even think of putting in an offer. It’s a competitive market right now, which means there are many eager homebuyers out there who’ve completed all their paperwork. Preapproval gives you an edge in a competitive real estate market. Again, sellers want to know that you have no problem obtaining a mortgage and closing soon after making your offer.
It’s also a good idea to get preapproved before you start house-shopping. That’s because you won’t waste any time looking at properties that you can’t really afford. If you fall in love with a house without knowing whether you can afford it, you may end up heartbroken. You need to know exactly how much in monthly loan payments your budget allows — and then stay within that boundary.
Now that you know the difference between getting prequalified vs. preapproved for mortgage loans, you can start house-hunting with confidence. Before long, you’ll be going over backsplashes in your open concept kitchen naturally and with ease, like any HGTV host.