Imagine finding the perfect home in an ideal neighborhood — and then finding out you can’t qualify for a mortgage. That’s more than disappointing; it’s downright discouraging. That’s why getting preapproved for a home loan can be an important first step in your house hunting process.
Prequalified or preapproved?
Mortgage terminology can be confusing, to say the least. One important distinction in becoming a “serious buyer” is knowing the difference in being “prequalified” from being “preapproved.”
Prequalifying means that you have been initially screened by a lender. It is only getting your foot in the door. Usually, you will submit some basic information, and the lender will provide a rough estimate of what you may be able to afford. Frankly, this won’t help much in your efforts to seal a deal on a home.
On the other hand, a mortgage preapproval takes the preliminary loan process a step farther. Additional financial information is gathered, likely including a credit report. In some instances, you may be asked to provide many of the same documents that will be required to complete the actual loan process, including tax returns, bank statements and employment verification.
With a preapproval letter from your lender, real estate agents and sellers know you are a serious buyer.
However, mortgage preapprovals are not a sure thing
A mortgage preapproval puts you head and shoulders above other buyers who may be interested in the same home as you are — but it’s certainly not a sure thing. The preapproval process does not include a full-fledged underwriting review by the lender, so it’s not an absolute commitment to issue you a home loan, though it is pretty close. There may even be conditions listed on the preapproval that are contingent to receiving a loan.
While a preapproval is proof that a lender is willing to make you a loan — in fact, wants to issue you a mortgage — a loan commitment will not be official until after full due diligence and application documentation has been completed. The lender can only do that once a particular property has been selected and a buy-sell agreement has been signed.
And, of course, there are still matters to attend to before closing on a home that can trip up the loan process. Among other things, you will need to make a sufficient down payment, and an appraisal of the value of the home you are attempting to purchase could be required.
When a mortgage preapproval is not necessary
There can be good reasons to skip loan preapproval when house hunting. If you’re doing research on a city or neighborhood that is simply a potential new home base — checking out home prices, schools and lifestyle — it’s best to wait until you have a better idea of what you’re willing to spend, and where.
Also, it’s a good idea to delay preapproval if you need to iron out some wrinkles in your credit history. Pulling your credit score and then determining what improvements can be made should be done before seeking preapproval for a home loan.
However, if your credit is solid and you’re on good financial footing, a preapproval will give you the confidence and flexibility to do some serious house hunting. Your real estate agent may even work harder to find you the perfect property — and you will have more leverage when negotiating a price.
And if you are looking to buy in a hot market — facing cash buyers — having a preapproval letter in hand is often required in order to place a bid. A loan preapproval may not be a home run, but it will get you on base.