What Is The Difference Between A Preapproval And A Prequalification?
Posted: Oct 09, 2013
When it comes to purchasing a home, there is a completely new set of financial terminology that is used. It is important to understand preapproval vs. prequalified because although they may sound similar, they are very different. Following is a quick breakdown of the difference between the two.
Prequalification is best described, as an estimated amount that the lender thinks is suitable for you based upon the information that you have provided to them. Generally, when you are going through the prequalification process, the lender will not do a credit review but will gather some additional information from you. This additional information includes your financial situation, income, the debt you have along with any assets. A prequalification can be easily conducted over the telephone and/or internet. Even though you may be prequalified for a loan, it does not necessarily mean that you will be approved and receive the money.
If you can think back to some radio commercials, especially for car dealerships, they may say something along the lines of ‘everyone is prequalified.’ This may get people to come into their dealership, but some might be let down when they find out that they will not be walking away with a new car. A prequalification is usually free and does not cost the parties involved any money to check the information out.
The same type of scenario holds true for homebuyers. It is common that purchasers may think that they are going to get a home loan when a lender prequalifies them. This is not the case and prequalification is just the initial step that is taken toward being approved. During this time though, questions can be asked and you can get a good idea about what steps need to be taken to meet your goal. You may not be able to get a mortgage right away but now you know what you need to do to make that happen.
Preapproval is a term used mostly surrounding mortgages. If you have already been prequalified and your lender preapproves you, they have reviewed any pertinent information and documentation that you have provided to them and are ready to lay down the terms and conditions of the loan. This is considered the second step to home buying. When you hear that you have been preapproved, it is a good thing and nine times out of ten, the lender will not charge you any additional fees other than the cost of obtaining your credit score.
This step is more involved than a prequalification and includes a mortgage application along with a more in depth analysis of your personal information. A background check will also be conducted at this time and after completion, you will have a better understanding of the interest rate you would be paying. You may either have a house picked out already but if you do not, now is the time you will have a better idea of what you can comfortably afford.
Checking the Credit Score
Before thinking about purchasing a home or a new vehicle, it is a good idea to check your credit score and report and pay down any open accounts. The more available credit that you have will be more beneficial when you contact a lender to start the mortgage process. Lenders are not going to just prequalify anyone without checking out all of their personal information. Purchasing a home is a large investment, not only for you but for a lender as well. If you are approved, they are willing to lend you a great deal of money and entrusting that you will pay them back.
When you finally make the decision to make a large purchase, expect to go through a process. Understanding each step of the process will not only keep you in the loop but also allow you to ask the proper questions before purchasing a home and ensure that you are not getting into something that is way over your head. A mishap like not understanding the difference between prequalification and preapproval can actually cost you that home that you have been dreaming about living in.
Joy Mali is an active blogger who is fond of writing articles on Finance and advising people to monitor their credit history to ensure a clean and error free report. Follow her on Twitter to know more on difference between Prequalified and Preapproved.