There is nothing more frustrating than spending every weekend for two months searching for a home only to discover that once you do find one, the bank will not lend you the money to purchase it. To avoid this frustration, potential homeowners can obtain loan preapproval which can be compared to a line of credit. However, loan preapproval should not be confused with loan prequalification as there is a distinct difference between the two. Which one is best and which one should you select?
Loan Prequalification
The process for obtaining loan prequalification is simple and quick. The loan officer takes a quick glance at your income, expenses and savings and then determines how much money he might lend you and at what interest rate. He might even give you a letter indicating that you are prequalified for a mortgage. Unfortunately, the letter is virtually worthless and you have not been guaranteed a mortgage. The lender is basing his prequalification decision on information you have supplied. Since the lender is not actually verifying the information, he is not legally obligated to give you a loan. As a result, loan prequalification sounds good, but you should go the extra step and obtain loan preapproval prior to beginning your house hunting.
Loan Preapproval
The process for obtaining loan preapproval is much more rigorous. The loan officer thoroughly investigates all aspects of your financial situation including: verifying present income and expenses, verifying the amount of savings, assets and liabilities, and the likelihood of continued employment. If you are self-employed you will be required to supply copies of your most recent tax returns as well as financial statements for your business.
This process can take as long as two to three weeks and many lenders will charge a processing fee. However, obtaining loan preapproval gives you several advantages such as:
- Knowing the exact amount you can borrow. This allows you to spend your time looking at homes that are in your price range rather than waste your time looking at homes that you ultimately cannot afford.
- Giving you an advantage over other potential home buyers. In a multiple-offer situation (i.e. more than one buyer is interested in the same house and both make an offer), the buyer with preapproval will be given more serious consideration than the buyer without preapproval.
Qualifying for a Mortgage Series
Qualifying for a Mortgage - The Basics
Buying a Home Without a Down Payment
The Facts Regarding a Down Payment
Understanding Your Credit Report
Understanding Your Credit Score
Loan Prequalification and Preapproval
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