Prequalification versus Preapproval

gmakerley

In the world of real estate transactions, the terms “prequalification” and “preapproval” are often used interchangeably, and this can lead to much confusion. The two mean entirely different things. Learning the difference before heading out to shop for a home can make a major difference in whether the deal ever actually closes.

Prequalification is a very good thing; it provides a wealth of valuable information for a potential borrower. First, it will provide a good snapshot of one’s borrowing power. Also, it is an easy and informal process and, therefore, not time-consuming. However, prequalification is based on unverified, undocumented financial information. It’s not given serious merit by real estate agents or sellers, and there is no indication of a clear commitment by a lender to complete a loan.

On the other hand, preapproval is a much more reliable tool. It provides a borrower with a detailed overview of his buying power. Preapproval is a formal process, and that makes it a bit more difficult to obtain than a prequalification. Income and assets are fully verified with all required documentation. As a result, sellers and real estate agents give a preapproval a great deal of credence. And, of course, obtaining preapproval from a lender demonstrates their willingness to close the deal.

It might take a little more time and effort to obtain a preapproval from your lender, but it’s well worth the effort in the long run. Having a preapproval letter in your pocket will make you a much more confident buyer. With that confidence, you can negotiate from strength, earning the respect and the attention of sellers and real estate agents.

Simply having been preapproved, you’ll be able to concentrate on homes within your specific price range, and you’ll have confidence in being able to arrive at a closing date much more quickly.

What do you need for an effective preapproval? Here’s a laundry list, which while not all-inclusive, will stand you in good stead as you venture forth into the home buying process.

For verification of income, you’ll want to provide your most recent month’s worth of pay stubs along with W2 forms for the past two years. In some cases, two years’ tax returns will be requested. For sources of income such as alimony/child support, Social Security, pension, etc. you’ll be required to provide documentation as well.

To verify your assets, provide the most recent bank and credit union statements for the past two months, along with any IRA, 401K, annuity information. If you plan to use gift money from a relative, let your loan officer know that also.

When reviewing your credit report, your loan officer is going to need to ensure that all debts are paid in an as-agreed fashion. If there are collection accounts, judgments, etc. you’ll be required, for the most part, to pay them in full prior to closing on a loan. Make sure you also provide documentation for any child support or alimony payments you may be required to pay.

Working with a loan officer to be preapproved is not hard work, and it is not intended to be a stressful time. You’ll be given an opportunity to know just where you stand, with confidence that your search for a home will be successful. Don’t settle for prequalifying; get preapproved.

manoj_gopale · Joined: 16 Feb 2009 Posts: 481 0.49 Dollars($)

Nice and informative information on the subject matter George! excellent is the only word to describe this.

gmakerley · Posted: Mon Jul 20, 2009 7:03 am Post subject:

thank you manoj

jk9999 · Joined: 15 Jul 2009 Posts: 110 1.53 Dollars($)

i was confused about this before and finally got it. The article clearly described the difference between the two.Very helpful.

savior70 · Posted: Fri Jul 31, 2009 4:47 am Post subject:

Hi George,

Thanks a lot for having taken pains to write this article for the community. It's informative, well-explained and will help many a prospective home buyers to understand the basic difference between 'prequalification' and 'pre-approval'. Such elaborate information does the new home buyers a world of good. Thanks again, George.

bensonclive · Joined: 16 Aug 2009 Posts: 91 -0.12 Dollars($)

george ,
this has turned out to be a nice piece of information for the reference and whenever the question will arise in future about the difference between these two terms I will without doubt forward this post to the people.
It is written in a well format as well as comprehensive manner.
thanks once again.

gmakerley · Posted: Fri Aug 21, 2009 7:20 am Post subject:

thanks, each of you, for the compliments.

thewretched02 · Joined: 23 Jun 2009 Posts: 115 23.90 Dollars($)

Nice post George.

Every time I've considered buying a house i've always ensured I'm pre approved for finance up to the level I'm willing to offer, and higher if possible. It just makes good sense to do the ground work first and know wht your borrowing power is.

It also provides the purchaser with an additional bargaining tool if you can make any offer not subject to finance approval - finance falling over is one of the main headaches sellers have, and they are often willing to accept a lower offer if you can make it not subject to finance approval - something that being preapproved makes possible.

So, basically it's just good sense all around to get your finance approval in place before you go shopping for houses - both for the purchaser and vendor.

thewretched02 · Joined: 21 Oct 2009 Posts: 18 3.29 Dollars($)

Is it easier to get approval froma bank you've been woth for a while?

Guest

Very nice! Alot of mortgage people over use the two terms and get the clients and even some real estate agents confused.

mrripper · Joined: 22 Oct 2009 Posts: 12 2.63 Dollars($)

If you are preapproved, do you have to submit new information if you want to increase the approval amount?

jenkin7 · Posted: Sat Oct 24, 2009 2:21 am Post subject:

Hi mrripper,

I believe you will have to submit new information if you want to apply for a larger amount of loan. You were pre-approved for a certain amount of loan based on certain information. Now, you cannot be approved for a larger amount of loan based on the same information. When you apply for a larger amount of debt, the lender will check if your income is sufficient to afford the mortgage. Thus, they will re-check your credit score, income and other factors before giving approval for a bigger loan.

gmakerley · Posted: Sun Oct 25, 2009 8:26 pm Post subject:

mrripper, if you have provided documenation in order to obtain a preapproval, your lender would have, i hope, maxed you out. by that i mean the lender would have analyzed all your data and determined that the maximum amount you would qualify for is $X. if that's true, then the only way you can qualify for more is if your income is greater or expenses less or you have a larger amount available for your down payment. if those situations have changed since your initial consultation, then you can move ahead and request a new preapproval for a higher amount.

and the answer to your question is that you would definitely have to provide updated documentation to the lender.

Guest

This something I explain to every client. It is so important for anyone looking to purchase or refinance. Throwing numbers and rates outthere is easy but being pre approved is waht put a stamp to your loan happening.

Sam
voyage home loans

gmakerley · Posted: Mon Oct 26, 2009 6:34 pm Post subject:

and the hardest thing to try to explain to someone is that it's nearly impossible to say "you're preapproved for $100000," when you know that if they look in this town instead of that one the taxes will be higher and it won't be quite that easy.

i try to give a range to everyone i deal with, stipulate a maximum monthly payment to qualify and explain that each time they get serious about a home, let me look at the numbers and see how they fit.

we have communities mere miles from each other with such a wide variety of tax liabilities on property that you'd be remiss to tell someone they're all set at a given number.

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