Prequalification vs. Preapproval: Unveiling the Differences
Understand the distinctions between prequalification and preapproval when it comes to the mortgage loan process. This article uncovers the differences and provides valuable insight.
Prequalification vs. Preapproval: Unveiling the Differences
Buying a home is one of the biggest decisions in a person's life. It involves plenty of research and paperwork, which can be quite overwhelming. Before embarking on the home buying journey, it is important to understand the distinction between prequalification and preapproval, as both are vital steps in getting the keys to a new house.
What is Prequalification?
Prequalification is the initial step in the home buying process, whereby a lender obtains basic information from a borrower--such as income, assets, and credit score--and gives a rough estimate of the loan amount for which the borrower is qualified. This estimate helps in giving an idea of the loan amount for which a person can apply.
What is Preapproval?
Preapproval is the second step in the home buying process. The lender obtains more detailed information from the borrower, such as bank statements and paystubs, and based on the documents, gives a more accurate loan amount. Furthermore, with the help of preapproval, one can negotiate on the purchase of the house as it demonstrates to sellers that the buyer is serious and can be trusted.
Key Differences between Prequalification and Preapproval
The key differences between prequalification and preapproval are as follows:
- Prequalification is the initial step of the home buying process and gives an estimated loan amount for which a person may qualify, whereas preapproval is the more detailed second step that tells a prospective borrower how much loan they are approved for.
- Prequalification is generally done in less time, and the documents required are minimal for it, whereas preapproval is more detailed and requires more documents.
- Prequalification depends on the information submitted by the borrower, which may or may not be accurate. On the other hand, with preapproval, the documents provided are proof and the lender will be sure of the borrower's ability to repay the loan.
Conclusion
Ideally, both prequalification and preapproval should be done by soon-to-be homeowners, since the former gives an initial idea of loan amount and the latter provides an assurance to the lender and seller. Although preapproval takes more time and effort, it provides more accuracy and hence should be done first.