The terms mortgage prequalification and mortgage preapproval seem to confuse some people. It is very important that you understand all the terms used when you are looking for a mortgage. If you are unsure what a particular term means, then ask. Prequalification for a mortgage does not mean that you have been approved for it. Here is why.
Mortgage prequalification refers to the amount of mortgage for which your bank or lender believes you may qualify. It gives you an idea of the price of home you can afford to look at. Most borrowers, particularly those seeking their first mortgage, are unsure what mortgage they might be offered and this helps them.
In order to undergo this process, you must supply your prospective lender with a full notification of your financial situation. You should be completely honest with your total income, debts and assets. A lender can use this information to assess the maximum amount of mortgage loan you may be offered on the basis of that information.
It is better to be prequalified for a certain ballpark figure than take a guess and be disappointed: either because you are refused the mortgage you need or are accepted and find you could have had more. Once you have been qualified, you can discuss the various options open to you with your lender. These include the type of mortgage most suited to you, interest rates and other options.
Mortgage pre-approval is beneficial to you, because you know how much of a mortgage you will be offered – not what you ‘might’ be offered. In some cases you might also be allowed to lock-in to a certain interest rate, even before you have selected your property. You can look for homes priced up to your allowed preapproved mortgage plus the down payment you can make, knowing your mortgage will likely be approved by the lender (see previous paragraph).
You must provide full documentation before having your mortgage approved in advance. Your credit record will be examined and FICO score requested. In effect, everything necessary when you apply for a mortgage will be carried out when you seek mortgage preapproval.
Mortgage Prequalification and Mortgage Pre-Approval: Which is the Better?
Mortgage prequalification does not involve a credit check, which is why you must be completely honest. A credit check can have a negative impact on your credit score (FICO score). That is why such searches are not carried out for prequalification, but are carried out for mortgage preapproval.
This also explains the fundamental difference between the two. Mortgage prequalification is unofficial since it is based upon your volunteered information, while a preapproval is based upon a credit search and documented proof of your overall financial situation. Prequalification is best if you want to look around at what is available in your price range, but might not buy right now.
Preapproval is best if you have made a decision to buy now, and are seeking the best property you can within your maximum price. Because preapproval involves a credit search, it impacts on your FICO score, and should not be requested unless you mean to use it.
It should be stated here that both mortgage prequalification and mortgage preapproval are only interim stages in the real estate-purchasing process. It is only when a loan commitment has been issued by a bank that the funding is actually confirmed. This is based upon both the preapproval and the property concerned. The latter must be appraised correctly and appear to the bank to be a good investment for the buying price involved. This makes sure that you do not make too high an offer just to secure your new home.