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These words sound so similar, but in the mortgage business, they mean two very different things.
A prequalification letter and a preapproval letter are similar. Both are free and provide you with the maximum amount of money the bank is willing to lend you, based on certain financial assumptions you provided the lender. Neither letter represents a guaranteed loan offer. This means you can receive prequalification and/or preapproval from multiple lenders at the same time. However, that is where the similarities end.
You can handle the prequalification process over the phone in a matter of minutes. You provide all of your information to the lender regarding income, assets and down payment. These are provided verbally. You don’t need written documentation. However, many lenders will pull your credit before issuing a prequalification letter.
Since income and assets are not verified, a prequalification letter is a less reliable indicator that you may actually qualify for a loan. But, if you are a W-2 employee with good credit, a prequalification may be sufficient for you before shopping for a home.
You must submit a full mortgage application for the preapproval process. This should be accompanied by income and asset documentation. An underwriter will review your loan to provide conditional approval. This process takes a little longer, but if you are self-employed or have a few dings on your credit report, pre-approval may be the way to go.
The good news is that once you have found your home, the mortgage process is faster. (Because you already completed many of the initial steps of the loan process.) If there are multiple offers on a home you are interested in, having a preapproval is another advantage. Borrowers with preapproval may appear as stronger potential buyers than those with just prequalification.
Deciding between a prequalification or preapproval is up to you. If you are in the market to purchase a home, many sellers will require you to have at least one of them in order to accept your offer.
The information voiced in this material is for general information and is not intended to provide specific advice or recommendations for any individual.
All loans subject to credit approval.