It's easy to get lost in real estate jargon when buying a house. Take mortgage prequalification and mortgage preapproval, for example. What's the difference? Each term relates to home financing. The words even look similar, but despite their common core, they are two separate things.
Let’s break down these two terms and learn what roles they play in the home-buying process.
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First Step: Organization
Before we get into these topics, let’s talk about financial organization. For either prequalification or preapproval to mean anything, your financial paperwork has to be in order. This is a good time to learn what you need to buy a house. To start, you’ll need to share complete information about your debt, assets, income, and the current status of your credit.
Documents to Gather
- A list of your current debts, such as credit card balances.
- A list of your assets, such as savings accounts, investment accounts, vehicles, or other valuable property.
- Proof of your income, such as your Leave and Earning Statement (LES) from your military MyPay account.
What Is Mortgage Prequalification?
Getting prequalified for a mortgage is an initial stage that helps you understand your potential home loan borrowing capacity. This estimate is based on customer-provided information, not on fact checks. It's mainly there for you to consider as you set a house-hunting budget, not to give you the momentum to put in an offer on your dream home.
How do you get prequalified for a mortgage? These days, it's easy to prequalify online or over the phone. This will give you an initial estimate of how much house you could potentially afford.
What to Expect with Loan Prequalification
- It’s quick and is often completed within a few minutes.
- Usually doesn't involves a full credit analysis, but some lenders will do a soft check that doesn’t damage your credit.
- It’s based solely on information the borrower provides to the lender.
- It’s not a guarantee of your preapproval amount.
With a quick overview of your accounts, you'll get a ballpark figure for a potential mortgage, which will help paint a picture of your home-buying budget. From this, you’ll know if the timing is right for you to invest in real estate. Perhaps your finances aren’t where they need to be. Now’s the time to take a step back and look at the big picture.
Remember, this initial review verifies that you can afford to buy a home and how much home you can likely buy. It is not the same as having preapproval for a mortgage. So, how do you get preapproved for a mortgage?
What Is Mortgage Preapproval?
After receiving your prequalification, it’s a good time to re-evaluate your numbers. Are you confident in your credit score or your debt-to-income ratio? If you feel comfortable buying a home, you'll move to the next step: applying for a mortgage.
This process involves an extensive financial background and credit check, and may include an application fee. Mortgage preapproval is based on a completed mortgage application, your credit history, your finances, and an estimate of your down payment.
With this information, the lender will provide you with a specific amount that you’re approved to borrow, as well as an interest rate. A statement of preapproval means so much more than being pre-qualified. With preapproval in hand, a serious home buyer now has the lender’s approval for a specific loan amount. And that’s what you want accompanying your offer on that dream house you’ve had your eye on.
Having a preapproval letter ready and waiting gives you an edge when pursuing a house. In a competitive seller’s market, when there are bidding wars and countless other buyers vying for the same property, proof that you can afford the home might be reason enough for your offer to rise to the top. Or perhaps the home seller is pressed for time before a PCS move. With your financing already lined up, they’ll know you’re a sure thing.
Not only should the process move a little faster, but it’s associated with less risk for the home buyer who accepts your offer. In this scenario, your pre-approved offer is just what that family needs to close on their home sale before they hit the road to their new assignment.
Should I Get Prequalified or Preapproved Before Buying a House?
The bottom line? Confirming mortgage preapproval conveys that you’re a serious buyer willing to place an offer quickly. This sets your bid apart if a competitive offer has a delay in financing.
Remember, prequalification is learning how much you can spend with a basic estimate for personal use only. A preapproval letter communicates to the buyer that you’re a serious buyer and strengthens your offer on a property.
The more prepared you are to buy a house, the easier it will be to navigate a deal. When you’re ready to start your house hunt, head to our home page to search for your next home. Before you know it, you’ll be settling into the home you’ve been dreaming of!
For even more information about how to buy a house, download MilitaryByOwner's free guide below.
