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Pathway to Homeownership: Preapproval and Prequalification
Dated: March 1 2023
Views: 92
So, you have decided you are ready to buy a house and have learned about some of your down payment options, now what? The next critical step is to get preapproved or prequalified for your home loan.One question I get asked from time to time, is there a difference between a preapproval and a prequalification? Yes, there is. Though to be honest most people use them interchangeably, even loan officers, and many don’t realize there is a difference, even agents. So, what is the difference? Both a prequalification and preapproval let the sellers know you are qualified to purchase a house, but one is much stronger than the other. Here is a simple summary of both terms.
A prequalification means the lender has determined that the borrower is qualified for a loan, up to a certain amount based on the financial information that the borrower has told or provided to the lender. For example, if I apply for a loan and tell the loan officer I net $50,000 per year in income after taxes and expenses, they will let me know the amount I am qualified to borrow based on that amount. Every lender will handle their requirements for a prequalification differently. Most of them will complete a basic credit check and some will want to see tax returns. A prequalification is generally much faster than a preapproval, and if all you are looking for is a general idea of what you could afford in a mortgage, this is a great first step.
A preapproval goes further and would be the next step in the mortgage approval process. To get preapproved a borrower is typically required to fill out a mortgage application, and the lender will do an in-depth look at their full credit score and history, tax returns, and employment history. Once a borrower is preapproved some lenders will allow the borrower the option of locking in a certain rate for a small fee, though most borrowers will do this once they have their new house under contract. Regardless, knowing you are preapproved will give the buyers and sellers much more confidence that the borrower will be able to perform on the loan and the sale.
Some lenders will even go a step or two further and get their buyer all the way through initial underwriting before they find a house to offer on. In this case, a lot of the work that the loan officer and their processors have to do is already completed, and all they have to do is add the details of the specific house to their file and wait for the appraisal to come back before they can close. If a borrower has gone through initial underwriting, they should be able to close much faster than the standard 30 days. The fastest I have seen a buyer needing a loan (not a cash buyer) be able to close is 9-10 days. As a side note, the fastest I have had a cash buyer be able to close on a house was 4 hours and that happened this summer on one of my listings, but that’s a story for another post.
Today one of my listings is closing. When we first listed the house we went under contract with a strong offer. Their lender had told me they had gone beyond a prequalification before going under contract. But a couple of weeks later when the lender went to finish underwriting they pulled the borrower's credit score for a final time, and a late payment on a credit card popped up. This late payment killed the borrower's loan approval, and we had to relist the house. Luckily, the new buyer we went under contract with had gone much further in the approval process and were able to close 12 days early. The fact that they had already gone through so much of the approval and underwriting process was one of the reasons my sellers chose their offer, for that buyer it absolutely paid off to be further into the process.
As you start on your homeownership journey, remember, a prequalification is a great first step, but the more you can get through the approval process the stronger buyer you will be and the faster your loan process will typically go once you find your new house
Ashley Wolthuis
Ashley Wolthuis is a graduate of Weber State University and furthered her education at Universitat Jaume I in Castellón, Spain, where she earned her Master’s Degree in Development Studies. Today, A....
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