Preapproved vs. Prequalified: Which Is Best When You’re House Hunting?

Preapproved vs. Prequalified: Which Is Best When You’re House Hunting?

Before you can buy a house, you have to know how you’ll pay for it. For 88 percent of homebuyers, that means financing the purchase with a loan, according to the National Association of Realtors’ 2018 Home Buyer and Seller Generational Trends Report.

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A major part of finding the right lender and knowing what you can afford is providing information to the bank, credit union or other lender. In order to prove you can continue to pay back the loan, with interest, over time.

There are two options to find out what a bank is willing to lend you. As long as everything checks out once you’ve picked a house: prequalification and preapproval.

Pre qualification

Having a prequalification letter from a lender means you’re conditionally approved to purchase a home up to a certain price, based on basic information about your income, debt and how much you have saved for a down payment. While prequalification doesn’t require the documentation and proof of funds needed for a preapproval, it’s particularly helpful for homebuyers who have no idea about their budget for a home. “Prequalification gets them in a position to shop,” says John Pataky, executive vice president at TIAA Bank.

Preapproval

With preapproval, you’re providing the details about your employment and financial information. Then letting the lender pull your credit history to learn more about you as a borrower. A preapproval means the lender is stating confidence in lending you a certain amount of money to purchase a home. Pending any issues with the house itself or unforeseen circumstances with your finances.

While the differences between preapproval and prequalification are merely a matter of reporting financial information versus providing documentation for it, a preapproval letter can be far more powerful when it comes time to place an offer on a home. That’s because with preapproval, the seller has proof of your lender’s confidence in you as a borrower. While prequalification makes it easier to shop for a home you can more realistically afford, preapproval gives you the strength to negotiate a purchase price, Pataky says.

Brian Simmons, founder and CEO of Ask a Lender, an online platform to help consumers shop lenders and loans and get financial advice, echoes the preference for preapproval: “One of the first things a buyer should do when they begin looking at homes is getting preapproved for a mortgage.”

If your local housing market is seeing frequent bidding wars and multiple offers on houses, a preapproval could help keep you from being overlooked by sellers who have many options to choose from when it comes to sale terms and price. Still, there are times when prequalification may be your best option to begin house hunting.

Click here to continue reading the article the article from US News about the five things to keep in mind as you decide whether prequalification or preapproval is the best move for you.