Being prepared is critical in the homebuying process. More often than not, sellers and their agents like to see that their buyer can secure the financing needed to purchase the home in question. That’s where preapproval vs. prequalification comes into play. But what’s the difference between the two? We spoke with a couple of experts, Kevin Leibowitz of Grayton Mortgage and Robert Niyazov of R&J Capital Group, to learn more.
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What Is Mortgage Prequalification?
Mortgage prequalification is an informal recommendation a mortgage professional creates for prospective buyers regarding their ability to secure financing for a home. As Leibowitz explains it, the information is all provided verbally in a conversation with the mortgage broker. The broker will then take all the borrower’s financial information to see if they could qualify for a loan without using any automated software or looking at bank statements.
Potential buyers might choose to pursue a prequalification vs. preapproval when they’re kickstarting their search to see what kinds of mortgages they could potentially secure. Leibowitz says it is a good way to estimate what you could comfortably afford.
However, it is essential to note that not all mortgage brokerages provide prequalifications. Niyazov says he rarely completes them since sellers expect buyers to have formal preapproval, not just a prequalification, especially in a competitive housing market. “It is important not to waste time if you are seriously looking to buy. Going through the actual preapproval process shows you are a serious homebuyer.”
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What Does Preapproval Mean for Homebuyers?
Mortgage preapproval is a formal process in which mortgage brokers determine if prospective borrowers can qualify for a mortgage of a specific value. The process involves more paperwork than prequalification because brokers have to look at tax returns, pay stubs, bank statements, and an official credit report. However, at the end of the process, the homebuyer will have an official preapproval letter to provide with their offer.
In addition to financial information, the broker will ask for details on the buyers’ prospective property or similar properties. Leibowitz prefers buyers to show a specific property, even if it’s off the market, so he has more numbers to crunch. However, providing a price range is also acceptable, Niyazov says.
Brokers use the same programs that Frannie Mae and Freddie Mac do to make their determination, called Automated Underwriting Systems. Learn more about different mortgage loan types, including Frannie Mae and Freddie Mac.
“We take the credit report, we look at the information as it’s presented to us, and we build a little computer profile for you. And then we run it through their model,” Leibowitz says. “And their model basically gives me a red light or green light.”
But what’s the point of the preapproval, besides sellers liking it? Well, you can’t actually get approved for a mortgage before you have a purchase agreement in your hands; banks won’t allow it. So, by getting preapproved, you’re not only showing the seller you can get a mortgage, but you’re also making it much easier to get that mortgage once you’ve completed the deal. Win-win!
“When we do submit it to underwriting, we get a quick approval. Because we’ve done a fair amount of the heavy lifting already,” Leibowitz says.
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How Long Does It Take to Be Preapproved or Prequalified?
It depends on the brokerage, but both processes are typically quick. Both Niyazov and Leibowitz say a borrower should hear back about a preapproval within a few days. Prequalifications are usually instantaneous since there’s not any paperwork to fill out.
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Preapproval vs. Prequalification: Tips to Keep in Mind
Just because you know your credit score doesn’t mean you know your mortgage score, especially if you’ve never had a mortgage before. That’s why mortgage brokers must pull your actual credit report to see where you stand. Leibowitz says many clients protest because they believe their credit score will go down, but checking your credit is a vital part of the process.
Often, problems with your credit score don’t appear until you’ve pulled it. For example, Leibowitz found out about a collection when he refinanced his home.
“You really need somebody to look at it just to make sure there are no skeletons in the closet,” he says. “My skeleton was with Spectrum regarding my cable box, and it tanked my credit score. It was a mistake on their part, but it took a while to correct and remove from my credit report.”
Additionally, preapprovals and prequalifications have “expiration dates,” primarily because bank statements and credit statements are only viable for a certain amount of days. Typically, a preapproval is only valid for about three months, Niyazov says. However, you can renew it if you allow your broker to pull your credit every 90 days.
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