When you’re considering buying a home, there are two terms you’ll hear, both of which are related to getting a mortgage loan. There’s mortgage pre-qualification and pre-approval. Sometimes people use these terms interchangeably, but they’re different from one another.
Understanding these terms is critical because they’re going to help you know what you can afford as you search for a home, and they’re also how you’re going to demonstrate you’re a serious buyer to a seller.
Both are similar in that they are steps along the way to get a mortgage, but if you have a preapproval, you don’t necessarily need a prequalification.
What is Prequalification?
A mortgage prequalification means that you provide a lender with some general financial information. The goal is to help provide you an estimate of how much you can afford when you’re buying a home.
The information you provide for prequalification is usually self-reported. Most of the time, it doesn’t include verification of your credit report. You can get a prequalification without dinging your credit report with a hard pull.
When you’re prequalified, you receive a letter that will show you can afford to buy. You can show it to your agent and sellers, and it may be helpful in the process, but not as much as a preapproval.
What is Preapproval?
A preapproval carries a lot more weight in the buying process. When you’re preapproved, you’ve submitted your financial history and the lender has verified the information you provide by checking your credit report, your employment and income, and your assets and debts.
For a preapproval, you’ll have to submit information like your total monthly expenses, W2s, pay stubs, and if you already own property, your mortgage statement.
Once you submit all the necessary documents, you receive a preapproval letter. This letter will outline the amount you’re approved for, and the type of mortgage a lender will give you as well as the terms.
A preapproval serves as an offer by the lender to you, and there is usually an expiration of the offer. For example, you might have 90 days to buy a home based on your preapproval.
How Do You Get a Mortgage Preapproval?
The following are steps to follow to get a mortgage preapproval:
• Get your own credit score. The higher your score, not only the more likely you are to be approved but the better the terms you’re likely to be offered. With most lenders, if you have at least a 740 credit score, you’re likely to qualify for the most favorable terms.
• When you check your credit score, go over your report and make sure there aren’t errors that need to be addressed.
• Calculate your debt-to-income ratio. To buy a home, you should aim to have a ratio of 36% or less. Your DTI is a ratio of your gross monthly income that goes toward paying debt.
• Gather the documents you’re likely to need to submit, such as your tax forms, employment details, and banking and account information. If you’re self-employed anticipate showing at least two years of income tax returns.
Finally, when you’re applying for preapprovals, shop around and talk to multiple lenders. This will help you find the lender that’s right for you so you increase your chances of getting approved, but also so that you can save money on interest with better terms.