Mortgage Preapproval vs. Prequalification: What’s the Difference?
As you start searching for the perfect home, you’ll likely hear that you need to be prequalified or preapproved for a mortgage before you can purchase a property. Prequalification and preapproval are types of mortgage approvals and refer to the steps a lender takes to verify if prospective buyers can afford a mortgage. While some may use the terms interchangeably, it’s important to understand the difference between the two terms as you embark on your homebuying journey.
Mortgage Prequalification
Getting prequalified for a mortgage is a common first step in the homebuying process that helps you understand your budget and mortgage options. To get prequalified, a mortgage lender will gather basic financial information from you to estimate how much home you can afford.
Once you have been prequalified, you’ll receive a “prequalification letter” to show real estate agents and sellers that you are working with a lender and are serious about purchasing a home. However, it is important to note that prequalification doesn’t guarantee mortgage approval. Rather, prequalification can be extremely helpful for prospective buyers who aren’t quite sure if they are ready for the financial responsibility of homeownership.
Mortgage Preapproval
While prequalification relies on self-reported information, mortgage preapproval takes it one step further as your lender verifies your official financial documents and information. Your lender uses the following to determine your financial well-being and to form a more accurate estimate of how much you can afford to borrow:
- Proof of income
- Tax documents
- Employment history
- Debt-to-income (DTI) ratio
- Loan-to-value (LTV) ratio
- Credit history
- FICO score
Similar to the prequalification process, you will receive a “preapproval letter” once you have been preapproved. However, compared to the prequalification letter, a preapproval letter carries much more weight with sellers and real estate agents since your lender has verified all of your information. When buyers and sellers know you are preapproved, they are more likely to see you as a viable buyer. In turn, they may be more willing to accept your offer and negotiate the property’s price if necessary.
Are you ready to start your homebuying journey? The team of professionals at Coastal Custom Mortgage can walk you through the prequalification and preapproval processes. We will then work closely with you to determine which mortgage program is the right fit for you and your individual needs. Contact Coastal Custom Mortgage today to get started!