When buying your first home, there is a lot to consider and much preparation before you sign the dotted line. One of the biggest factors is figuring out financing, and whether or not you should get a mortgage preapproval or a mortgage prequalification. There’s a lot of terminology and it’s easy to get confused. Let’s break it down.
Mortgage Preapproval
A mortgage preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. Being preapproved means you've already been approved by a lender for a specific loan amount. After completing a mortgage application, the lender will verify the information you provide. They'll also perform a credit check.
A preapproval does not guarantee a mortgage will be approved. But it is a thorough review of your financial background that gives you a realistic idea of how much you can afford to borrow if your application is approved.
Getting a mortgage preapproval can help you shop with confidence. Going through the preapproval process with a lender is quick and easy, and it puts you in a better position to negotiate on pricing and make an informed decision about financing.
Find out how much you can afford to borrow with our mortgage preapproval calculator.
Mortgage Prequalification
Mortgage prequalification tends to refer to less rigorous assessments, and may require less personal and financial information to be shared with a creditor. As a result, an offer based on a prequalification may be less accurate or even less likely to be approved than an offer based on a preapproval.
A mortgage prequalification often comes in the form of a letter from a lender, and states that the lender is tentatively willing to lend to you, up to a certain loan amount. This document is based on certain conditions and it is not a guaranteed loan offer.
How to Decide Between Preapproval vs. Prequalification
Now you know what each term means, but which is right for you? Is a prequalification as good as a preapproval? Here are some things to consider for each option.
A mortgage prequalification gives you an idea of your budget, helps you learn about your options, and could put you in a better negotiation position with the seller. The drawback is that it can affect your credit score and a mortgage prequalification is a preliminary overview, and not guaranteed.
A mortgage preapproval goes deeper into your financial history, so it’s a stronger, more solid identification of what you can afford. It’s a more official step that takes the process one step further than mortgage prequalification. Because of its in-depth nature, the preapproval process takes longer, but it’s worth the wait. It will prove valuable when making an offer in a competitive market.
In summary, mortgage prequalification lets you start researching the market with a ballpark range in mind. Mortgage preapproval is a more rigorous process that provides a more dialed in budget that allows you to make an offer with confidence. Regardless of what you’re ready for, DCU can help you get started and ultimately find a home.
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This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
