When you’re getting ready to start looking for homes, you’re probably dreaming about more space, a big backyard, or a garage, rather than low mortgage interest rates. But failing to get preapproved before home shopping can result in heartbreak. Do you know the difference between pre approval vs pre qualified when it comes to mortgage loans?
Marcus Rittman, director of mortgage operations at HomeLight Home Loans, has seen that “the catalyst for most homeowners wanting to get approved for a mortgage is finding a home that they love.” The problem is, if they haven’t been preapproved, they’re “scrambling to get approved and can miss out on a home because it takes time.”
Don’t let that be you! Here’s what you need to know about pre approval vs pre qualified vs underwritten preapproval so that you know which one you’ll need before touring your first home.
Why do you need to jump through these hoops?
Why even bother to apply for preapproval? Why not wait until you’ve made an offer on a house?
Chris Austin, an experienced agent in the Kansas City, Missouri, area, warns that if you start home shopping without getting preapproved, “You could be growing a taste for something you can’t afford — or maybe you can afford more than you think.” A preapproval helps you establish your home shopping budget.
Most real estate agents won’t work with buyers until they’ve talked to a lender so that they have a clear idea of what you can afford. Sellers also prefer offers from preapproved buyers because there’s less risk to them that the offer will fall through. The long and the short of it: Getting preapproved helps you compete in the housing market.
If you want to buy a house, the lender or bank will need to know how much money you make and how much debt you have. There are a few different ways that lenders can do this before you’re actually applying for a mortgage, and some are more robust than others.
When you start the prequalification process, you’ll share your income and debts with mortgage lenders — but in most cases, they won’t ask you for verification.
To get prequalified for a mortgage loan, you simply have to state information, not prove it. Rittman says that you’ll share your income, debt, and available down payment.
“Based on that,” he says, “the systems will spit out a number and say what you’re prequalified for. But nothing has been verified.”
The lenders will likely also check your credit score and use it, plus the information you disclose, to give you a ballpark number for how much money you can borrow. Getting prequalified is one way to assess your budget — but most sellers aren’t going to accept an offer based on a prequalification; it’s not airtight enough. According to Rittman, it’s better used as a guideline.
A preapproval is generally a step up from a prequalification (although sometimes these words are used interchangeably, which can be frustrating). In addition to filling out the majority of a loan application and disclosing income, you’ll often be asked to share some documents with your mortgage lender(s) to help prove how much income you have and your debt load. Most lenders will request some or all of the following, depending on the depth of their preapproval requirements:
- Two years of tax returns
- W-2s and 1099s (for freelance income)
- Pay stubs
- Profit-and-loss statements for self-employed individuals
- Letters of explanation for gaps in employment
- Proof of other forms of income (real estate, child support, alimony, and so on)
- Source of the down payment funds
- Bank statements
- Retirement or brokerage account statements
The lender could also request additional documents if you have special circumstances, such as a past foreclosure or bankruptcy. Everything the lender asks for helps them verify the information you’ve given them regarding your assets and debts.
A preapproval is generally considered a conditional commitment to lend, but your final loan approval still depends upon a successful completion of the full underwriting process. Unlike a prequalification, because it is at least partially verified, it should have a more specific borrowing limit and may include information about your interest rate and terms.
When you make an offer that’s accepted — which is much more likely with a preapproval than with a prequalification — and you provide a valid purchase agreement, your lender will then complete the underwriting process to clear your loan to close.
Underwriting is where things tend to fall apart in the closing process if they are going to fall apart. It’s often the longest step to getting a loan, and it can continue right up until a few days prior to your scheduled closing. An underwriter is going to look at all your documents with a fine-toothed comb to check their accuracy.
Some of the items they may check for accuracy include:
- Is the name and date of birth exactly the same on every document?
- Do all of the financial numbers align? Is there any money missing, or money that’s present but somehow unaccounted for in your documentation?
- Where did your down payment money come from?
- Are all the boxes ticked (or unticked) where they need to be?
If there are any issues, the loan won’t be finalized until they’re resolved. This can delay closing and sometimes jeopardize the entire deal.
After underwriting, an updated credit score is pulled to ensure you’re still good there, and then you’re clear to close.
Don’t want to wait until underwriting to find out if you can buy your dream home? A fully underwritten preapproval is one way to get most of the underwriting done before you make an offer — so you can close faster, with fewer surprises. Sellers like underwritten preapprovals even better than preapprovals.
You’ll submit all your financial documents just like for preapproval, but the underwriter will take a look at everything before you ever make an offer on the house. They’ll perform the same due diligence on your documents as they would during underwriting the actual loan.
“It might seem like more work for the client,” Rittman says, “but it saves a ton of time, and it’s a much smoother process down the road.”
With an underwritten preapproval, you might be able to close in as few as 21 days. Your offer will stand out and appeal to sellers even more, especially if the sellers are looking for a fast close.
… Incidentally, underwritten preapproval is what HomeLight Home Loans does. Rittman is a “big believer of getting approved ahead of time,” and points out that “it’s not a big deal to have your approval updated as you’re looking.” If you’re better prepared before entering the housing market, you’ll have a more successful home search.
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