When it comes to the home-buying process, a key part of the equation is being ready. That means making sure you can demonstrate to a seller your ability to pay for the home in which you’re looking to make an offer, and having some up-front documentation from a lender.
A prequalification letter gives future home buyers an opinion of the range of the amount they may be able to borrow to buy a home. It is based on non-verified information provided by the applicant and does not include a credit report inquiry.
A preapproval gives future home buyers an estimate of the amount they may be able to borrow to buy a home, based on an initial review of financial information provided by the customer and credit report information.
Since a prequalification is not based on verified information, it only takes about 5-10 minutes. A preapproval will take approximately 20-30 minutes on average to interview the customer, enter their information into the origination system, pull a credit report and receive a preliminary credit decision.
A preapproval letter should be updated if the customer’s offer exceeds the estimated maximum loan amount. If the purchase price/loan amount needed by the customer is lower than the preapproval letter, a new preapproval is not required. A new preapproval for a larger amount may be generated at the customer’s request, and a higher credit amount authorized if the customer qualifies for the new amount.
When consumers are qualified for each new home pricing scenario, it is common for a future home buyer to ask for multiple preapproval letters for a variety of loan choices. A higher preapproval amount is subject to additional review to ensure the customer qualifies for the new amount.
Some other things to keep in mind:
- A preapproval letter will give assurance to sellers that you will likely be able to secure a mortgage based on your credit report, but it is not a guarantee you will be approved. That approval process takes place when, after your offer has been accepted, that the mortgage underwriters approve your loan.
- A prequalification letter can be helpful to buyers who are looking to understand the price range they should concentrate on during the home search, but is not the best option to accompany an actual bid.
- In addition to having your credit scores pulled, the lender will base their preapproval letter based on W-2 forms, a current pay stub, a summary of your assets and your total monthly expenses. If you already own a home, you would also need to provide the mortgage statement and a copy of your homeowner’s insurance policy.
To summarize: A preapproval letter is much more serious than a prequalification letter. It shows you are ready and qualified to buy a home at a certain price point. It’s what you want in your hands if you are home shopping and need to move quickly.