Despite sounding identical, a prequalified mortgage is not the same as a preapproved mortgage. Prequalification is generally a quick, free process where a bank takes your financial information and lets you know generally what your loan will look like. Preapproval is actually a follow-up process that is much more involved and often costs money. Preapproval requires a credit check, a mortgage application and an estimate of your own down payment. For help with a mortgage, consider finding a financial advisor.
Getting Prequalified for a Mortgage
Getting a prequalification on your home mortgage is simply a basic step. It’s like a fact-finding mission and does not signal to sellers that you are a true buyer. A prequalification from a mortgage lender tells you the types of loans that are available, how much it may be willing to lend to you and what your payments could possibly be.
But a prequalification is not a binding agreement. It’s simply meant to be informational. It gives you an idea of what is out there and helps you start planning.
Being prequalified for a mortgage is a good starting point if you are on the fence and you’re trying to decide if you want to rent or buy a home. But if you are serious about buying a home, you might want to learn how to get preapproved for a mortgage.
Preapproved Mortgages
Getting preapproved for a mortgage shows that you aren’t playing any games. There isn’t a requirement to use a particular lender. And if you want to, you can apply for mortgage preapproval online. The mortgage preapproval process is fairly in-depth. The bank will want to see proof of your income and debts. Here is a list of documents that you typically have to provide lenders to for mortgage loan preapproval:
- Tax returns
- Pay stubs
- W-2 for several years
- Loan information
- Information about other mortgages (if applicable)
- Credit report
- And other pertinent financial information
Prequalified Mortgages vs. Preapproved Mortgages: Which Is Best for You?
Now that you know what the difference is between prequalified mortgages and preapproved mortgages, you have to decide which route you’ll go as you embark on your homebuying process. When a buyer gets a preapproved mortgage from a lender, it sends a clear signal to the seller. They know now that you are a real contender. Your offers have real meat on the bone and should be considered.
You are a qualified buyer when you have a home loan preapproval. The bank has done its due diligence and they are ready to lend you money. The buyer now understands that you do not have to make an offer contingent on financing.
A preapproved mortgage will lock in your interest rate for a set time period while you house hunt. You know exactly how much you can spend and you know what your monthly mortgage payments will be thanks to your mortgage preapproval estimate. You are in a much better position to buy the home you want with a mortgage preapproval letter in your hand.
If you’ve got bad credit, however, your chances of getting mortgage preapproval are slimmer. If a lender is willing to offer you a preapproved home loan, your interest rates might be higher than normal. You might even have a hard time qualifying for FHA mortgage preapproval if your credit score is somewhere below 500. Sometimes borrowers with poor credit have to pay a higher down payment.
Bottom Line
Though preapproved and prequalifed may sound like the exact same thing, when it comes to mortgage they are two very different situations. Getting prequalified for a mortgage is a very fast process where a bank takes a very quick look at your financial situation and lets you know what your loan might look like. It isn’t terribly in-depth. A preapproved loan, on the other hand, is a much more rigorous process. It generally comes after prequalification and involves a credit check, a mortgage application and an estimate of what your down payment will be. The process to get preapproved also generally costs money.
Mortgage Tips
- A financial advisor can help with any mortgage questions you have. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Want to calculate your mortgage payment? Use SmartAsset’s free mortgage calculator to see what your monthly payment will look like based on your down payment, rate and total cost.
- Before you go into a house hunt, it’s important to know exactly what your price range is. This isn’t always easy to figure out. SmartAsset can help, though, with our free tool which calculates just how much house you can afford.
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