If you’re starting to think about buying a home, you probably know that you’ll need to get prequalification or preapproval for a mortgage early in the process. These terms can be confusing since they’re often used interchangeably. However, they are different steps, so it’s useful to understand how each one works. There can also be some variation among lenders, so make sure to check with your lender for specifics. In general though, prequalification is a simpler first step, while preapproval offers a guarantee that you’re financially prepared for a mortgage.
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Prequalification is based on what you tell the lender. They won’t independently check whether the income or debt numbers you provide are accurate, and they won’t ask for any documentation. The lender will check your credit. Some lenders do a hard inquiry, which can affect your credit score, while others only do a soft inquiry, which does not. If you’re concerned about this, ask your lender about their process before you apply for prequalification. Once you’ve prequalified, the lender will give you a written letter stating that you have prequalified for a mortgage of a certain amount.
Preapproval is a much more involved process, but it’s also ultimately more useful in the home-buying process. To get preapproval, you’ll fill out a formal mortgage application and provide documentation of your financial situation. You’ll usually need to provide your two most recent federal and state tax returns, your W-2 forms, recent paystubs, bank statements and retirement or brokerage account statements. These documents all prove that you have the steady income necessary to make the mortgage payments and the savings to make your down payment. You’ll also need to provide information about your current debts. This includes credit card debt, student loans or car loans. If you already own a home, you’ll provide your current mortgage information. If you rent, you’ll probably need to provide proof of your last year’s rent payments.
During a preapproval application, your lender will do a hard inquiry into your credit. A hard inquiry can cause your score to drop by a few points, but the effect is minimal, and your score should go back up in a few months. Credit bureaus generally count multiple inquiries in a 30-day period as one inquiry for the purpose of calculating your credit score. This means that shopping around and applying for preapproval for multiple lenders won’t hurt your credit score.
Depending on the lender’s system, preapproval can take anywhere from a few minutes to a week. When you’re preapproved for a mortgage, the lender will give you a specific interest rate. You can safely assume that you’ll get the mortgage offered in the preapproval when you buy a home as long as your financial situation stays the same.
When Should You Get Prequalified?
Prequalification is just an estimate, so it’s less useful than preapproval in most cases. However, it can be a useful tool if you’re in the early stages of house shopping. For example, if you aren’t actually ready to make a purchase yet, but you’re starting to research what your budget can get you in your area, prequalification can help you get a more specific idea of what your budget might be. However, it won’t be useful for actually looking at properties or putting in offers, especially in a competitive market. Some buyers opt to start with prequalification earlier on and then move on to preapproval when they’re ready to start looking seriously.
When Should You Get Preapproved?
Most sellers want to see a preapproval before they’ll consider an offer. Real estate agents, especially in very hot markets, might not even want to show you homes without a preapproval letter. This means you should get preapproved for a mortgage before you start looking at houses. The housing market is competitive in most areas, so you’ll want to have your preapproval ready to go when you find the perfect place.
Preapprovals are usually good for 90 days, and you can ask your lender to extend the preapproval if needed. This means you shouldn’t need to worry about getting preapproved too early in the buying process. You don’t need to be prequalified before you’re preapproved. If you know you’re ready to start shopping seriously, you can skip prequalification and go straight to preapproval. It’s also important to remember that you don’t need to borrow the entire amount you’re preapproved for. The amount your lender believes you can afford might be more than what’s comfortable for your budget.
How Do You Finalize Your Mortgage After Preapproval?
Preapproval doesn’t mean actually applying for a loan. You’ll complete your full loan application after you’ve had an offer accepted. When you apply for a mortgage with a lender that’s already given you preapproval, the application is simpler because the lender will already have most of the documentation they need. You’ll just need to give them your purchase agreement and sometimes updated pay stubs or bank statements. You’ll also need to schedule a home inspection, which will determine whether there are any serious problems that will need repairs, and a home appraisal, which will independently confirm the property’s value. Then you’ll go through the final underwriting process. You won’t need to do anything during underwriting unless your lender has additional questions for you. After underwriting, you’ll schedule a closing, which is when you’ll sign your final mortgage paperwork.
Whether you plan to start with a prequalification or are ready to apply for preapproval, the first step in the mortgage process is talking to a lender about your individual financial situation. Intercoastal Mortgage is here to help. Visit our website to find a lender near you today.