While both prequalified and preapproved mortgages sound the same, there are several differences between the two that potential homebuyers need to know. With a little extra time and effort, you can have a leg up in negotiating your next home purchase.
What Is A Prequalified Mortgage?
Getting a prequalification on your home mortgage is simply a basic step. It is like a fact-finding mission and does not signal to sellers that you are a true buyer. A prequalification is a precursor and often not worth your time. Go straight for a preapproval of your mortgage if you are a serious buyer.
A prequalification from a mortgage lender tells you the types of loans that are available, how much they may be willing to lend to you and what your payments could possibly be. But it is not a binding agreement. It is simply informational. It gives you an idea of what is out there and helps you start your planning.
Being prequalified for a mortgage is a good starting point if you are on the fence trying to decide if you want to rent or buy a home. But, if you are serious about buying a home, you should get preapproved for a mortgage.
What Is A Preapproved Mortgage?
Getting preapproved for a mortgage shows that you are serious. There isn’t a requirement to use a particular lender, but most buyers stick with the one who approved them. Preapproval of a mortgage is a fairly in-depth process. The bank will want to see proof of your income and debts.
Here is a list of documents that you typically have to provide lenders to get preapproved for a mortgage.
- Tax returns
- Pay stubs
- W-2 for several years
- Loan information
- Information about other mortgages (if applicable)
- Credit report
- And other pertinent financial information
I remember that our lender had a couple of follow up questions after we submitted our mortgage application for preapproval. It was not a big deal, but we did have to show proof of certain debts and income.
Which Is Better For You?
When a buyer gets a preapproved mortgage from a lender, it sends a much clearer signal to the seller. They know now that you are a serious contender. Your offers have real meat on the bone and should be considered.
You are a qualified buyer when you have a mortgage preapproved. The bank has done its due diligence, and they are ready to lend you money. The buyer now understands that you do not have to make an offer contingent on financing.
A preapproved mortgage will lock in your interest rate for a set time period while you house hunt. You know exactly how much you can spend, and you know what your monthly mortgage payments will be. You are in a much better position of knowledge and power with a preapproved mortgage in your hand.
Like most large purchases such as a house or a car, knowledge is power. It puts you in a better negotiating position. When you have a preapproved mortgage, you know how much you can spend and what your costs will be. You do not have to wait for bank approval. You already have it. You will be taken more seriously and will have better negotiating power with the seller with a preapproved mortgage. Skip the prequalified mortgage, and go straight for preapproval if you are a serious buyer.
Photo Credit: TriState Finance NY