Prequalification and Pre-approval are often used interchangeably, but they mean different things. Prequalification (often shortened to prequal) is a basic overview analysis of a borrower's ability to get a loan. The borrower's financial information is collected verbally, but not verified.
With a Pre-approval, you submit several financial, tax, and employment documents; as this is a more thorough process. Neither is a guarantee that you'll get a loan, although a Pre-approval provides for a stronger and more reliable gauge of loan worthiness.
A Pre-approval does not include all the paperwork, though. Title work and appraisal (both items cost you money to get) will need to be done when you actually apply for a loan. When you are Pre-approved, you cannot get these, because you often don't have a property in mind yet.
With a Pre-approval, you, the borrower, are being approved for the loan from a financial standpoint. The property itself will still need to be approved.
So, why would you ever bother to get Prequalified? Prequalification gives you a starting place, helping you sort out whether you can possibly get a mortgage loan. It is fast and easy to do. There is no point in going through the Pre-approval process if you don't have the income, assets, or credit score to move forward.
However if you can get Prequalified for a loan, you should go through the Pre-approval process next. Realtors® and sellers will most likely need this before going too far along the buying or selling process with you. They want to insure that you can actually get a mortgage loan before showing homes that you may not qualify for, saving all parties time, money, and frustration.
If you provide all the needed information, what could go wrong? Why is Pre-approval necessary? When you get prequaled you might think you have all the information you need.
For example, if you say you think you have $8,000 in your bank account, you are Prequalified based upon that figure. Later you realize that you really only have $6,000, so now you may not have enough assets to qualify for a loan.
However, Pre-approval isn't a sure thing either. If you get Pre-approved based on March's bank statements that say you have a balance of $7,600, but by the time you go through the application process you only have $5,600 showing on your April statement, that may cause difficulty in your loan process as well.
It is critical that you maintain your employment, bank balance, income and credit score during the entire loan application process. Prequalification and Pre-approval are based on these numbers; should they change, so does your eligibility.
The first step will be to get Prequalified for a loan, second step is to get Pre-approved. Then shop for a home based on the amount you are Pre-approved for, and then apply for the home loan once you have an accepted offer and are under contract. If you follow these steps, it will save you a lot of time and aggravation on the mortgage loan process.
