December 23, 2010
Prequalified vs. preapproved for a loan
(Photo: Alan Cleaver/Flickr)
There is an important difference between being prequalified for a mortgage and being preapproved for one.
Even so, a lot of lay people don’t know there’s a difference.
When you prequalify for a loan, it is an informal process where a lender says what you might be able to borrow.
Oftentimes, you simply speak with a lender on the phone for about a half an hour.
The lender will ask you some questions about your income, your expenses and your other debts. You should try to give the lender accurate amounts because it’s the best way to find out quickly what you can actually borrow.
After doing a few calculations, the lender will tell you how much you can borrow.
But, because it’s an informal process, you don’t have any real advantage in negotiations with a seller.
To do that, you need to be preapproved.
Getting preapproved for a mortgage
With a preapproval letter, you can make a bigger impact on the seller because they know you’re good for it.
The drawback is that the process is a bit more involved.
The lender will review your earnings, assets, and credit history, verify your employment, and read through your tax returns.
In the end, you get a letter from the lender saying that he or she would be willing to loan you a specified amount over a certain time period.
That time period is often 60 days.
Lots of people say the hassle is worth it when you might be looking at a home where several buyers are making bids.
If you think about it, it makes perfect sense. All things even, a seller would naturally want someone who’s preapproved for a mortgage because it’s one less thing to worry about.