January 21, 2021
Preapproval v/s Prequalification: Aren’t the Two Terms Same?
By : Ellie Brown
and prequalification are the two terms lenders use to make the borrowers feel
safe about the mortgage. Borrowers often think of them as the same in terms of
meaning and impact on the approval. Both of them indeed share some similarities
along with a fundamental difference.
The real estate is a market where many potential buyers try their best effort to secure a deal. Here, the sellers make the decision based on the negotiations and profile of the buyers. Preapproval and prequalification allow you to create a strong profile with a determined budget.
This blog has explained the similarities and difference between the preapproval and prequalification for the potential borrowers.
What is Prequalified?
Prequalification is the quick analysis of your financial eligibility for a loan amount. It is the first step towards creating a budget for the home. Here, the lender asks for some details to give you an idea of the loan amount available for your profile.
At this stage, you only get an idea of the amount, not the approval. The final amount may change after the complete process of the mortgage application. Therefore, the actual budget for the loan is a majority of the times different from the prequalified amount.
You need to have the income, assets, debts, and credit history on papers to get the prequalification. The lenders will not verify the details submitted for prequalification. Therefore, it doesn’t matter whether the details are real or fake from the lender’s perspective.
The ideal time to get a prequalification is the initial stage of the home buying process. Once you have established yourself as ready to buy a home, you can contact the lender for a prequalified mortgage amount. They are very prominent in the first direct loans offered by private lenders.
What is Preapproval?
Preapproval is challenging to get when compared to prequalification for a mortgage. It involves comprehensive research by the lenders about the details on the loan application. The lenders will assess your income, assets, liabilities, credit history, and other financial information.
They will reject the mortgage application if any of the detail is found incorrect or falsified. The preapproved loan amount is what you can afford in terms of repayment according to the lender. Therefore, it is a concrete idea about the budget for the house with minimal risk of default.
However, it is recommended not to trust the lenders entirely with the house budget. Sometimes they offer huge mortgage only to derail your budget for other expenses. It makes no sense to spend your monthly income on the mortgage repayment with no retirement and emergency fund.
You don’t need just numbers to get preapproval from the lenders. They may ask for proof of income, identification, assets, and credit history to give a preapproved amount. You can skip the prequalification and directly apply for preapproval in the initial stage of the process.
What are the Similarities?
There are some similarities with the terms preapproval and prequalification that has confused. Some lenders even use the terms interchangeably because of their own defined meanings. Here are some similarities between the two terms –
- They are Not Necessary for Approval
You are not required to get a prequalification or preapproval to get a mortgage from lenders. You need to apply for the mortgage with direct approval from the lenders. Also, they don’t mean guaranteed approval as the underwriter can still reject the application.
- You don’t need the Same Lender
It is normal to apply mortgage to some other lender than the one who preapproved or prequalified you. You need to consider the interest rates or APR to get the best deal. However, the resubmission of the documents will be a tedious task.
- Their Purpose is Same
Both preapproval and prequalification allow you to create a budget for the house. You need them in the initial stage to narrow down the search in the sea of real estate. This prevents the heartbreak when the selected house is found out of budget.
What are the Differences?
The process for the preapproval and prequalification creates some significant difference between the two terms. One is easier to get, while the other involves some severe verification. Let us discuss those differences with a concise explanation.
- Estimate or Specific Amount
Prequalification gives you an estimate of the offered loan amount. They might reduce it after the documentation. You get a specific amount lender is willing to offer with the preapproval to design a budget.
- Documentation Process
As mentioned above, you only need to feel the details to get prequalified for an amount. At the same time, the preapproval requires document submission and verification. False information can get you prequalified but not preapproved.
- Credit History Check
Lenders will check your credit history for verification and financial assessment in preapproval. There is no credit check for the prequalification of the loan.
To conclude, prequalification and preapproval are two terms with a significant difference in their process. The seller weighs preapproval more than the prequalification while selecting the buyers. However, none of them guarantees a loan and impacts the overall cost.