Prequalification vs Preapproval — Both are Good Ideas

When it comes to buying a home, looking at your finances is a good first step. You need to know how much home you can afford and how that breaks down into a monthly mortgage payment. You also need to know how much down payment you might need (20 percent is not always required).

Ready to help you find those answers is a mortgage lender.

Prequalification

As you discuss your options for acquiring a mortgage, your lender will likely take you through a prequalification process. This gives you an estimate on how much you might be able to borrow. You’ll need to provide basic information, such as:

• Income
• Bank account balance
• Down payment amount
• Desired mortgage amount

None of this information has to be verified at this point. You’ll also undergo a credit check. A higher credit score can give you a better mortgage rate. Knowing your credit score will allow your lender to better estimate what your monthly mortgage might be.

Remember, however, that this is only an estimate. If you want to get an even better idea of how much home you can afford, you’ll want to take the further step of preapproval.

Preapproval

Getting a preapproval takes more time and paperwork than a prequalification, but it’s as close of a commitment to your ability to secure a mortgage as you can get without actually securing a mortgage. It also can show your builder how serious you are when it comes to buying a home and give them more confidence regarding the customizations you might want to make on a new-build home. Items needed for a preapproval include:

• Copies of pay stubs showing your most recent 30 days of income
• Bank account numbers or two most recent bank statements
• Down payment amount
• Desired mortgage amount
• W-2 statements
• Signed personal and business tax returns for the last two years

Like a prequalification, your lender will also run a credit check. It can take up to 10 days to find out if you’re approved for your requested amount. If so, your lender will give you a preapproval letter that is an offer to lend you a specified amount of money. It is typically good for 90 days.

If you’re just starting to look for a home, prequalification is a quick and easy way to know if you’re financially able to purchase a home. When you’re getting closer to purchasing a home, go ahead and provide all of the documentation for a preapproval — it’s what you’ll need to secure a mortgage and at least you’ll have this step out of the way so you can concentrate on other things.

If you’re not sure how to find a mortgage lender, ask your bank. Many builders also have preferred lenders, and sometimes, there are special money-saving incentives when you use them.