Navigating the home buying process and all its different terms can be confusing. Two terms that you may have heard before are “prequalification” and “preapproval”. A gold standard is to get pre-approved if you plan to buy a home within 90 days. If you plan to purchase a home within 6+ months, get prequalified.
Read on for an overview of what these terms mean, their important differences, and how to secure them to aid in your home search:
What Is a Mortgage Prequalification?
A mortgage prequalification helps buyers determine how much house they can afford before they begin the home buying process.
Why Get a Mortgage Prequalification?
Real estate agents want to see a mortgage prequalification before they begin showing you houses so that they only show you things that you can actually afford. For example, say that you think you can afford to buy a $500,000 house, so you start setting up tours of houses in this price range.
Later on in your application process, you come to find out that you can’t actually afford to spend $500,000 on a house — according to your mortgage lender, you can only afford to spend $400,000.
So not only does that mean that you’ve wasted your real estate agent’s time by looking at houses that you can’t afford, it means that you may now have unrealistic expectations in terms of what you can actually get in a house based on your lower price range.
How To Get a Mortgage Prequalification
The process of receiving a mortgage prequalification is relatively quick and easy, so there’s really no reason not to do it before you start your home search. To receive a mortgage prequalification, you will provide the lender with basic financial information about your income, bank accounts, and desired down payment.
The lender will also do a credit check to get a better idea of your financial situation. They will determine what you can afford to spend on a house by examining your credit card usage. However, the rest of the information gathered during the prequalification process is all self-reported and isn’t verified by the lender.
For this reason, it’s important to be as detailed and honest as possible to get an accurate estimate of what your price range is for a home.
Since the mortgage prequalification process is less involved and doesn’t require a lot of fact-checking on the part of the lender, you can likely get your prequalification information very quickly — even within the hour, depending on the lender.
What Is a Mortgage Preapproval?
A mortgage preapproval helps buyers submit serious and competitive offers once they’re ready to move forward with purchasing a specific property.
Why Get a Mortgage Preapproval?
In such a competitive market, sellers want to see that you have a mortgage preapproval when you submit an offer since a preapproval indicates that you’re likely to be approved for the actual mortgage.
The last thing the seller wants is for the sale to fall through because you can’t secure financing, and this helps them feel confident about accepting your offer.
A mortgage preapproval also gives you a better idea of what your interest rate might be when you actually apply for a mortgage loan. Keep in mind that the more money you pay in interest, the less money you will be able to spend on a house.
How To Get a Mortgage Preapproval
The process of receiving a mortgage preapproval is much more involved than with a mortgage prequalification. If you’re considering getting a mortgage preapproval, it helps to come prepared with relevant financial documentation.
Most lenders will want to see your two most recent pay stubs, your two most recent income statements (W-2s or 1099s), your two most recent tax returns, your two most recent bank statements, and recent statements from other accounts like retirement accounts and investment accounts. They will also discuss how much you want and can afford to put down on the house.
The lender will then run your credit to see what your credit score is and check for any financial red flags. Since more documentation is required for a preapproval, the process usually takes longer — potentially up to ten business days, depending on the lender.
Once you have your preapproval, you will have all the information you need to feel confident about moving forward with your home purchase since you can more easily calculate your monthly mortgage payments with both principal and interest.
What’s the Difference Between the Two?
As you can see, there are clear differences between a mortgage prequalification and a mortgage preapproval. A mortgage prequalification is less involved than a preapproval, requires less documentation, and takes less time.
On the other hand, the process of obtaining a mortgage preapproval is quite involved as it requires extensive documentation and can take several days to complete. When it comes to buying a house, a mortgage preapproval is seen as more valuable. It shows that you’re a legitimate home buyer with the finances and resources to back up your offer.
Which One Should You Get?
Whether you should get a mortgage prequalification or preapproval really depends on where you’re at in the home buying process. If you’re in the initial phases of the home buying process or are simply considering buying a home, then you should get a prequalification to give you a better idea of what you can afford. This information can help you decide if it makes sense for you to buy.
However, if you’re more serious about the home buying process and are ready to get moving, then you should get a mortgage preapproval that gives you all the information you need to start looking at homes and put in offers once you’ve found a home you love.
Where Should You Get One?
There are a few different places where you can receive a mortgage prequalification and/or preapproval. For starters, traditional lenders like big banks often offer mortgage loans and are willing to provide mortgage prequalifications and preapprovals. Working with a big bank can come with strict requirements in terms of credit scores, assets, income, and employment history.
If you’re looking for a more flexible option for your home loan, then you may want to consider going with a private lender for preapproval or prequalification. Private lenders are usually willing to work with borrowers from diverse backgrounds, including foreign borrowers who may not have income or credit history in the United States.
Mortgage brokers effectively act as middlemen between the borrower and the lender. They work with many different lenders to provide borrowers with countless loan options. They can also negotiate with lenders on behalf of borrowers to get better interest rates.
When you work with a mortgage broker, you only have to go through the prequalification/preapproval process once instead of having to do it several times for each individual lender. This can help streamline the process and save you a lot of time and potential headaches in the loan process.
Working with a mortgage broker is ideal if you’re looking for a specific type of loan that might be hard to find on your own. It’s also ideal if you’re looking for additional guidance throughout the entire lending process.
Just keep in mind that mortgage brokers make money off the loans they close, and they may be paid more for certain types of loans than others. So make sure that any loans recommended to you by a mortgage broker are actually the best option for you before you sign.
How Many Lenders Should You Go to?
If you’ve decided not to go the mortgage broker route and are approaching lenders on your own, you might be wondering how many different lenders you should go to for a mortgage prequalification and preapproval letter.
Since each lender has a different process, they will likely offer you different interest rates. At the end of the day, your goal should be to lock in the lowest possible interest rate as even small differences of one-tenth of one percent can translate into thousands of dollars over the term of a 30-year loan.
As a general rule of thumb, you should try to get a preapproval from at least three different lenders. If possible, you may want to try getting preapproved by five different lenders to make sure that you’re getting the best possible terms and interest rates.
And while there’s technically no limit to the number of lenders you can go to for a preapproval, you don’t want to waste your time, which is why three to five is usually the sweet spot.
How To Choose Your Lender
Now that you have preapprovals in hand, how can you make sure that you’re choosing the right lender for your mortgage loan? Obviously, one of the most important factors relates to interest rates. However, interest rates aren’t everything.
For starters, you need to look into the closing costs charged by the potential lenders. Closing costs are designed to cover things like loan underwriting, title search, title insurance, home inspection, home appraisal, credit report, and more. Closing costs typically range from 2% to 5% of the value of the loan — which actually ends up being quite a large range.
So let’s say that you have a $300,000 loan, and one lender is charging 2% for closing costs while the other is charging 5%. That’s a difference of $9,000 right off the bat that you need to take into consideration.
You also need to look into mortgage points. Mortgage points can be purchased to effectively lower your interest rate at the cost of 1% of the loan value for a corresponding 1% decrease in interest rate. If you’re planning on staying in your home for an extended period of time, it might make sense for you to purchase mortgage points to lower your interest rate and save money in interest.
However, not all lenders offer mortgage points. So if this is something you’re interested in, make sure that it’s offered by your lender before moving forward.
Finally, you need to consider customer service. After all, you will be working with this lender for years to come, so they need to be easy to contact in the event of an issue. So make sure that your lender is responsive and helpful throughout the preapproval and prequalification processes. Also, try to check out customer reviews to ensure that these qualities extend past the initial phases of the process into the repayment process.
Get Prequalified and Preapproved With Vaster Today
If you’re looking for an experienced private lender that’s flexible and efficient to boot, look no further than Vaster. Vaster has years of experience in the mortgage industry and is ready and willing to help you finance the property of your dreams.