It pays to learn about the mortgage process so that you’re ready when the right house comes along. Here’s what to know about mortgage preapproval and prequalification.
WHAT PREAPPROVAL FOR A HOME LOAN MEANS
When a mortgage lender preapproves you, they’re stating they would be willing to provide you with a loan of a specific amount. It’s a tentative declaration that isn’t a commitment, but it tells you the lender determined what your finances are and feels comfortable loaning you the specific amount listed in the preapproval letter. That number gives you a ballpark range of what you can afford when you shop for a house.
IS PREAPPROVAL REQUIRED?
Generally, no, but some sellers may require it. Preapproval shows house sellers that you’re a serious buyer, and if you’re shopping in a competitive region, being preapproved can give you a leg up.
REQUIRED DOCUMENTS FOR PREAPPROVAL
Getting preapproved is similar to applying for a mortgage. Every lender will have slightly different requirements, but you can expect to be asked to provide the following information:
- Social security number
- Proof of income and employment information
- Recent W-2s (1099s if applicable)
- Bank account information
HOW IS PREQUALIFICATION DIFFERENT FROM PREAPPROVAL?
Prequalification is much easier and more informal than preapproval. Prequalification requires only basic information. In fact, some lenders may not even need to pull your credit report to prequalify you for a loan. Prequalification primarily benefits you, the buyer. It can help you understand your mortgage budget (how much you can afford to borrow), so you can set your expectations when you begin shopping for a house. Prequalification typically requires sharing the following information with a lender:
- Assets (including savings)
- Credit score
With that information, the lender should be able to give you a rough idea of how much of a mortgage loan you might qualify for. Use it as a gauge rather than a sure thing.
HOW LONG DOES THE PREAPPROVAL PROCESS TAKE?
The length of time for preapproval will vary by lender. You could have an answer in less than 24 hours or it could take up two weeks. But most lenders will let you know if you’re preapproved within a few business days.
How long your preapproval lasts will also vary by lender. Generally, you can expect you’ll need a new preapproval after 90 days. However, it’s important to understand that preapproval isn’t a guarantee of a specific loan amount, and the further you get from your initial preapproval date, the more likely it is that changes to your finances might lead to a change in terms. (For example, maybe you forgot to pay a hefty credit card bill and your credit score took a hit, which no longer qualifies you for your preapproved interest rate.) Even if your preapproval hasn’t expired, the loan terms you get when you apply for a mortgage could look different from the deal you were expecting.
FINDING A GOOD LOAN OFFICER
Word of mouth, talking to friends, and consumer reviews are a good way to find a trustworthy loan officer. If you’re using a realtor, that person might have a relationship with a loan officer that they can vouch for.
Ideally, you should try to get preapproved with multiple lenders to see what kind of rates and offers you can get.
ARE LARGE LOAN COMPANIES TRUSTWORTHY?
It’s certainly fine to use larger companies like Rocket Mortgage or Better Mortgage. They may have more modern conveniences than smaller companies have, such as a faster approval process, for example. Just like any option, make sure you know what you’re getting into and compare options whenever possible.