Prequalification vs Preapproval
When you’re getting ready to buy a home, especially if it’s your first home, you may feel overwhelmed by the number of steps involved and number of people involved in helping you along the way. Don’t worry, the process may seem overwhelming as a whole, but when you partner with a good agent and good lender, your purchasing experience will be smooth and steady.
Before you start looking at homes, it’s a good idea to connect with a lender and discuss your financial readiness. For some individuals, they are 100% ready to go, which is great! Then it is just a matter of understanding some of the fees involved in getting a loan, closing costs, down payments, and what “feels comfortable” in terms of a monthly payment. Once you establish that, searching for a home becomes a lot easier because you feel comfortable and confident with your finances.
You’re going to be extremely excited after you close and move into your new home, but remember that excitement will wear off over time, but that monthly payment will stick around for a 5, 10, 20, or 30 years. So make sure to spend the time with your lender discussing your options up front.
If you aren’t quite ready, maybe you don’t have enough money for a down payment, or have lower credit you need to work on, or maybe you don’t have enough job history / recorded income yet. Don’t worry! You will get there. Be patient and give yourself some time to work on those items. You’d be surprised what even just a year of working on things can do for you.
Fast forward… you’re now ready to get pre-approved. Which brings us to our discussion today, what is the difference between a pre-qualification and a pre-approval?
A pre-approval letter is a letter written by a lender stating their intent to provide a loan to you, based on the information you’ve provided them. A pre-approval is more “reliable” than a prequalification letter, as most lenders require more information up front in order to “pre-approve” you.
For example, a lender may ask for your past 3 paystubs, your past 2 years of tax returns and ask for a print out of your current bank account reserves (to verify your income and the amount of money you have available for a down payment). This verification on the front-end can help you make a competitive offer, especially during a hot, competitive market.
A prequalification on the other hand, doesn’t often require as much verification on the front-end. A lender may initially connect with you over the phone for 15-30 minutes and be able to “pre-qualify” you within the hour. This is especially pertinent in a competitive market, where you need a prequalification / preapproval letter at the time you submit an offer. Most lenders, after doing a preliminary prequalification, will still want to meet up with you to go through the pre-approval process and collect some documentation to verify the information provided.
Most anyone can get a prequalification or preapproval letter if one is dishonest, but when it comes time to provide documentation, they may have a problem. Be honest with your lender, you want to be transparent about your debts, income, and other financial information.
Overall, when submitting an offer, it’s a good idea to have a preapproval letter or prequalification letter attached with your offer. It is not required, but it is helpful! If you have the time to provide your lender some documentation up-front, that will help both you and your lender in the long run.
So… where should you start first? With a lender or with an agent? Either is just fine. If you sit down with an agent first, they can help walk you through the entire buying process and then recommend a few good local lenders. If you sit down with a lender first, you’ll have the confidence going into your agent meeting on what you can afford and what payment you want to be around. Either way, you’ll be in good shape!
If you want to talk to an agent on our team to get started or have questions, feel free to reach us below! Or you can call Austin at (715) 212-4693 or email him at [email protected]. We look forward to connecting and hope this resource was helpful to you.