If you’re considering purchasing a new home with the help of financing, chances are you’ve come across the terms “preapproval” and “prequalification” quite a few times. While these terms may sound similar, they’re quite different. In this article, we’ll define both of these home financing terms and what you need to know about them.
What is prequalification?
In the mortgage industry, prequalification refers to the estimated amount a lender may loan you for a home purchase based on written or verbal information about your finances. Because prequalification requires no verification, many real estate agents will encourage home buyers to secure preapproval instead.
Related: How Much Do You Need for A Down Payment to Buy A House?
What is preapproval?
In the homebuying world, preapproval is the verified amount a lender plans to loan you for your home purchase. This means the lender has run a full credit check and reviewed key income documents. As a result, the lender can “pre-approve” you for an estimated loan amount at an estimated interest rate. While the lender will still need to go through the actual loan approval process once your offer on a home is accepted, a preapproval letter is essential when submitting an attractive offer to a seller.
Prequalification vs. preapproval: What’s the difference?
Both prequalification and preapproval letters indicate how much loan a lender believes you qualify for—but only preapproval is considered meaningful. That’s because, as stated, prequalification is not verified by a lender. In the eyes of most real estate agents—and the lender itself—prequalification doesn’t mean much. To make a solid offer on a home that is contingent upon successful financing, you’ll want an up-to-date preapproval letter in your hands.
How to get preapproved for a home loan
If you are interested in buying a new home (or any home) with the help of financing, you’ll want to speak to a lender about the preapproval process as soon as possible. While many lenders can rapidly provide preapproval letters should you instantly fall in love with a house, it’s always easier to determine how much home you can afford—and how much a lender might loan you—before shopping for homes. Plus, when you find the home or your dreams or decide to build a new home yourself, that preapproval letter can make the offer-writing process that much faster.
To get an official preapproval letter, your lender may require you to present the following:
- Your credit score and your credit report
- Your W2s, pay stubs, and proof of employment
- Your bank statements and tax returns
- Your driver’s license
- Any gift letters, if somebody else is providing you with any funds for the home
While gathering these documents may take a few minutes, you’ll need to have these items in order to secure a loan anyway. So it’s definitely worth taking the time to get your paperwork in order.
Related: The Credit Score Needed to Buy a New Home
About True Homes
At True Homes, we work with various lenders that can help you understand how much home you can afford. These lenders can review your financials and get you preapproved for a home loan so you can start browsing for your new construction dream home in North Carolina or South Carolina today.