Prequalification vs. Preapproval

In the ABCs of home buying, some terms sound a lot like others. For instance, prequalification versus preapproval. Knowing the nuances of these two terms could mean the difference between a successful home purchase and a lost opportunity.

In a competitive real estate market, the slightest advantage can determine whether one offer is accepted over another. Taking some time to learn key terminology can help provide that edge.

According to the Consumer Financial Protection Bureau (CFPB), “prequalification and preapproval both refer to a letter from a lender that specifies how much the lender is willing to lend to you, up to a certain amount and based on certain assumptions. These letters provide useful information but are not guaranteed loan offers.”

So, what is the difference between prequalification and preapproval? Ultimately, it’s all about the level of information.

Prequalification is quick and easy and relies on the buyer’s word about his or her monetary situation. It can be beneficial to get prequalified early in the home buying process, as this will help provide an idea of the type of home you can afford.

On the other hand, preapproval requires thorough documentation and proof that your numbers are accurate and current. Preapproval is needed once you are ready to buy a home and intend to purchase within 60 to 90 days.

To get preapproved, you will need to provide documents that show proof of income and employment, including pay stubs and W-2s or federal tax return documents. Bank statements and proof of other assets will also be necessary. Additionally, your credit score will be pulled, and your credit report will be thoroughly examined.

Preapproval results in a hard number that a lender is willing to loan you to purchase a home and gives you credibility as a buyer.

Being armed with this information early in the process is important. Knowing your limits will help you narrow your home search. After all, you don’t want to spend a lot of time looking at homes that are outside your preapproved price range.

Ready to get prequalified or preapproved? Contact an Mlend expert today and we will help get you started.

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