Prequalification in the mortgage process is an initial step and usually quite simple. Information you provide verbally to the about your finances — such as income, assets and debts — are used in a preliminary assessment about the size of mortgage for which you qualify.
This is a preliminary step, often done over the phone, and based solely on the information provided by you. At this time, the lender is not verifying the accuracy of information and may not even check your credit, relying instead on you to give a credit score range.
This prequalification can be helpful as it provides a strong indication of the amount for which you might expect to be approved. This is helpful to home buyers who can limit home searches based on that amount and it gives your offer credibility with sellers and agents.
However, it’s important to keep in mind that pre-qualification is an approximation, not a promise of approval. All facts provided by the home buyer must be thoroughly investigated by the lender through an in-depth analysis.
Preapproval carries more weight and is a more involved process. It shows prospective sellers that you have your financing in order and are one step closer to obtaining an actual mortgage. The lender verifies your information and reviews your credit report in order to make a decision. The amount of documentation required regarding income, assets and debts varies by lender.
Preapproval helps home buyers stand out in a competitive market and can often be a deciding factor when multiple offers are made.
Remember, to stay positive. There is always a possibility that you may not qualify for as much as you’d hoped, or the interest rate you wanted. That may not be the best news, but it’s better to hear it earlier in the process. Remember too that some flaws in your credit report are often easily correctable. For example, perhaps you have an outstanding bill from your old residence, but you were unaware because they didn’t have your current address. Address those situations before entering final negotiations with a seller.
