You’re excited to buy a house, but there’s one key factor you must complete first: home financing. You know you need to work with a mortgage lender to get the funds for your new purchase, but what’s the best way to go about it?
The road to your home loan goes through prequalification and preapproval, two important steps toward closing on the home of your dreams. These steps are important, but there are a few complications to clear up while you pursue them.
First of all, what do they really mean?
Prequalification tends to come first and be a general check of your financial strength. Preapproval follows and gives you a clearer picture of how large a mortgage loan you are approved for. To purchase a home quickly and without fuss, especially in a competitive seller’s market, it can pay to go through both steps early in your homebuying journey.
This answer has to come with an asterisk because every mortgage lender will have a slightly different process of checks and approvals. One bank may have a “preapproval” approach that is very similar to another bank’s “prequalification” process.
Another slight wrinkle comes from the fact that prequalification and preapproval are similar in concept. They both involve checking your financial background and end with you receiving a letter that proves your general readiness to buy a home. As you’ll see, prequalification tends to lead smoothly into preapproval as your commitment deepens.
With those disclaimers out of the way, it’s time to dig into the matter of prequalified vs. preapproved, their meanings, and their roles in getting you into a new home you love.
What does mortgage prequalification mean?
Mortgage prequalification means a mortgage lender has judged that your finances are strong enough to pay for a home loan. This is an early step in the process of buying a new home, but a meaningful one. It shows that a bank has faith in you, helping you proceed with the purchase.
What will it take to get prequalified? The specifics differ from one lender to the next. While there may be a credit check involved, the kind of intensive check that can affect your credit score is more associated with preapproval — we’ll get to that in a moment.
Applying for prequalification means submitting your financial information to the lender, giving the bank a clear enough picture to determine whether you should be buying a house at this time.
The review process associated with mortgage prequalification likely won’t give you an exact dollar amount that you can borrow, and actually getting a home loan will require additional, more formal checks of your finances. With that said, prequalification is a good early step in the home financing process. It lets you estimate how much you can afford and may help you proceed into negotiations with sellers.
Going through the prequalification process with your home lender gives you information. If you’re not ready to apply for a loan, it’s good to know at this stage. If you’re financially sound enough, you can move on and start deciding which type of loan product is best for you.
What does mortgage preapproval mean?
If prequalification is a general review of your financial situation, preapproval is more about the specifics. How much home can you afford? This is the step where you will undergo a credit check that affects your credit score.
Rather than just relying on your self-provided financial information, the bank will perform due diligence before issuing you a preapproval letter. The more intensive nature of this process means preapproval will bring you closer to closing on a home.
This is the step where details about your mortgage come into focus. What type of home loan is right for you? What kind of interest rate is your lender prepared to offer you? What is the maximum amount you will be approved to borrow?
Getting preapproved will take longer than prequalification, with the extra checks taking time. While prequalification is sometimes a simple, all-online process, the same is not true of preapproval. There may also be application fees to contend with.
Seeing a preapproval letter with all of these details will help a seller close a deal, as it is proof you have the financial means to complete the transaction and buy the house in question.
Preapproval is not a contract with a lender. You can be preapproved by several lenders, determining which banks are ready to work with you. You don’t have to make a hard commitment until you’re actually signing the loan paperwork. You can wait until you have finalized loan estimates from one or more lenders before you put pen to paper.
How can you speed up the homebuying process?
Getting through mortgage prequalification and preapproval — in that order — is a good step to take to make sure you’re on a direct and quick path to buying a new home.
By going through these processes, you have proven you’re a serious prospect to purchase the home in question. This is important at any time, and especially in a seller’s market, where you’ll be competing with other potential buyers.
A lot of the major questions regarding your home loan application are settled during a typical preapproval journey: What type of loan suits you best? What is the upper value of a home you can afford? How much can you expect to pay in your down payment, and what type of interest rate do you qualify for?
You can get preapproved relatively early in your home search, to make sure you are through the process and have all the necessary information by the time you start making serious inquiries. You should keep in mind, however, that some preapproval letters expire after a set period has elapsed.
All of these preliminary steps toward homeownership have their own value. As you go through the financial checks and negotiations with lenders, you have plenty of opportunities to learn about your own financial situation and build confidence.
What is your best option after receiving home loan approval?
Actually making an offer on a home for sale can be a nerve-wracking process — or it can be easy. While working with a real estate agent is the traditional model of buying a home, there are new and more streamlined approaches to consider.
For example, when you work with Bungalo, every step of purchasing your dream home has been cut down to the essentials. Homes listed through Bungalo are clearly priced, fully checked and guaranteed for condition issues, and simple to close on.
Prequalification and preapproval are still parts of the home-buying experience when you choose Bungalo. You can work with any home loan provider, going through the steps to become preapproved.
This preapproval step is important because it enables the whole experience to proceed seamlessly. There won’t be an unexpected hitch, because the loan officer at the bank has already given you the OK for a certain amount of money. This way, you won’t risk losing money on one-time costs associated with a house purchase, including appraisal fees.
If you have a preapproval letter from a lender, you can submit your offer for a Bungalo-listed house online. The process takes minutes. Instead of the traditional methods of home buying, which involved bidding wars against competing offers and negotiations with sellers, this process leads smoothly into closing.
Check for Bungalo-listed houses in your area and start dreaming about your perfect new home.
This article is meant for informational purposes only and is not intended to be construed as financial, tax, legal, real estate, insurance, or investment advice. Bungalo always encourages you to reach out to an advisor regarding your own situation.
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