Prequalification and preapproval are two distinct steps in the process of obtaining a mortgage loan. While they both contribute to the goal of homeownership, they have different meanings and implications.
Prequalification:
Prequalification is an informal process where you provide information about your financial situation to the lender. This includes details about your debt, income, and assets. Based on this information, the lender estimates the amount you may be eligible to borrow. In some cases, the lender may conduct a soft credit check, which does not impact your credit score.
Prequalification can be done over the phone, online, or in person. It serves as an initial step to help you understand your borrowing capacity and explore different mortgage options.
Example: Suppose you provide your lender with information about your income, debts, and assets. Based on this information, the lender estimates that you may be eligible for a mortgage loan of up to $300,000.
Preapproval:
Preapproval involves a more formal and comprehensive evaluation of your financial history. You will need to provide documentation that supports the information you provided during prequalification. This includes W-2s, pay stubs, proof of assets, and other relevant financial records. The lender will verify your income, employment status, assets, and debts. They will also pull a credit report on you.
If you meet the lender's criteria during the preapproval process, you will receive a letter outlining the specific amount and type of mortgage loan the lender is willing to offer you, along with the associated terms. Preapproval is a crucial step in the homebuying process as it demonstrates to sellers that you are a serious buyer with a high likelihood of securing financing.
Example: After reviewing your financial history and verifying the provided documentation, the lender determines that you are preapproved for a mortgage loan of up to $250,000 with a fixed interest rate of 3.5% for a term of 30 years.
Both prequalification and preapproval help you understand your borrowing options and provide valuable information for your real estate agent or REALTOR®. They will assist your agent in identifying suitable homes within your budget and negotiating with sellers on your behalf.
It's important to note that prequalification is not a guarantee of a loan, whereas preapproval carries more weight and increases your chances of securing financing when making an offer on a property.
References:
Texas REALTORS® - Understand the Difference Between Prequalification and Preapproval