Fall is an ideal time to shop for a new home. The market has quieted from the frenzy of spring and summer real estate activity. And prices may be lower, as sellers work to close a deal before the traditionally slow market during the holidays.
Before you engage a real estate agent or spend a weekend visiting open houses, do a little homework so you’ll be ready to find your next home. A crucial task is assessing how likely you are to get approved for the mortgage amount you may seek.
Youll hear the terms preapproved and prequalified. Both have value and the terms are often interchangeable. One will get you closer to obtaining a mortgage, however, so its important to understand the difference.
Prequalification for a Mortgage
Getting prequalified for a mortgage is a preliminary step in which a lender takes a basic assessment of your financial situation to see if you fit the criteria for a loan. You give the lender info about your income, assets and debts and the lender gives you an approximate loan amount you might qualify for.
The lender then gives you a letter stating how much mortgage you may qualify for. The process of getting prequalified is not a formal credit application. A letter is not a guarantee that an actual loan offer may follow. A prequalification letter typically is good for 60 to 90 days.
If youre simply testing the housing market and not positive youll apply for a mortgage, prequalification may be a good first step. It’s a fairly easy process. The turnaround for prequalification is usually quick.
Preapproval for a Mortgage
The preapproval process is more involved and indicates youve been tentatively accepted by a mortgage lender for a loan. In addition to providing information about your income, assets and debts, you may need to produce employment verification, recent bank statements, proof you have funds for a down payment, recent tax returns, etc. The lender will also run your credit report and score from the major reporting bureaus.
The advantage of being preapproved is that youll have a solid idea of what price house you can actually afford. Being preapproved shows the seller youre a serious shopper and not just checking out the market. Because the lender takes a much closer look at your financial situation, getting preapproved may take a bit longer. A mortgage preapproval also has an expiration date – usually 90 days.
Which Letter to Seek
The terms prequalified and preapproved are often used interchangeably. Check with reputable real estate agents in your area to see if they discern a difference. If preapproved buyers are the ideal in your area, and youre a serious buyer, make the extra effort to work with a lender who will help you get preapproved. If agents treat potential buyers the same, seek whichever works best for your situation.
Remember no matter which kind of letter you receive, neither is an actual guarantee youll get a mortgage from the lender who prequalified or preapproved you. Such a letter also does not obligate you to actually seek a mortgage either. Always shop around before applying for a mortgage and signing on the dotted line, as interest rates and other conditions vary from lender to lender.
Advantages of Doing Financial Homework
Of course, you can shop for a new house without either kind of letter from a lender, but due diligence offers several advantages:
- Many real estate agents and sellers require a letter of prequalification or preapproval. They wont waste time with casual home shoppers who are not financially capable of buying a house in a particular price range.
- Working with lenders in advance will save you time and disappointment so you wont get your heart set on a home beyond your means.
- You may find youll qualify for a home in a higher price range than what you initially targeted. This gives you the opportunity to make a larger investment in a home, if that suits your needs.
- If youre working with an agent who does not require prequalification or preapproval, such a letter may put you ahead of the pack. Your professional approach to shopping the real estate market will help make you an ideal client. A client the agent wants to spend time and energy on.
- A letter from a lender may also help your offer stand out to the home seller. When the real estate market is highly competitive, this can be a definite advantage.
- Being prequalified or preapproved will help expedite the offer stage and the closing date when you find your new home.
Shopping for a new home may take a while before youre ready to zero in on a neighborhood and make an offer. Keep in touch with your lender during the process, as real estate loan rates can change with no warning.