Home Mortgages: Preapproval vs Prequalification

For a new home buyer, the process of finding, buying, and moving into a new home can be very exciting and extremely fun. However, it can also be very stressful.

Most home buyers, especially ones that are buying their first home, will have to get a mortgage. A mortgage is a special type of loan that is for the value of the home and uses the actually property as collateral.

In the event that the borrower can not pay the monthly mortgage payments, the lender will take possession of the home and sell it to help recoup their losses. This is referred to as foreclosure and if the home does not sell for the entire value of the mortgage, the borrower may still owe the bank money.

Typically one of the first steps in purchasing a home is to speak with a mortgage lender. This will allow the individual to determine if they are eligible to receive a loan and help them to get an idea of what type of loan would be available. In the mortgage industry it is usually possible to be preapproved for a mortgage or prequalified for a mortgage. Some lenders will use these terms as one, with little distinction, but there is actually a difference between the two.

If an individual is prequalified for a mortgage, this means that the bank has asked the individual a series of questions involving their finances. This includes things like the individuals debt load and current assets. The lender than uses this information to offer an estimate of what type of mortgage they could offer and the value of this mortgage. However, none of this information is actually verified and instead the lender takes the borrower at their word.

Some lenders will do a prequalification over the phone and fax or email over a prequalification letter right away. As a result, a prequalification letter is not considered a very strong lender by most real estate agents and sellers. Many will require more information before they agree to sell their home.

A preapproval letter, on the other hand, is considered to be much stronger, although it is not a guarantee. If a buyer has been preapproved, this means that the bank has taken several extra steps to verify that the information provided is correct. This could be by running the individuals credit or requiring pay and tax statements from the borrower. Once they have verified the information, the lender provides a preapproval letter stating the amount that they will offer.

Even though an individual has been preapproved, this does not guarantee that they will be approved for the mortgage. Most mortgage brokers and lenders will not actually complete the buyers mortgage application until they have actually found a home, made an offer, and had this offer approved. At this point a more official application process will begin, which usually requires a loan application fee. The lender will then officially process the application and are under no legal obligation to honor the preapproval letter.

A preapproval letter is much stronger than a prequalification letter, but it is not a guarantee that the borrower will actually be able to get the mortgage. Most lenders will not actually process the application until a home has been found and are not legally obligated to honor the preapproval letter.

So, while most will view a preapproval letter as much stronger than a prequalification letter, additional proof is often required by sellers. This is especially true in today's housing market and for first mortgage buyers, because the credit industry has become much stricter in their lending practices.