A prequalification for a house means that you have spoken with someone about the possibility of getting a loan. This could be a loan officer or even your real estate agent or broker. They will calculate your income and debt based on what you tell them, run the figures to see approximately how much you might be approved for. The key word here is might. With a prequalification, you walk away with no guarantee of a loan.
On the other hand, being preapproved means you apply for a mortgage as if you have already found and are ready to purchase the property. The lender will review your qualifications; check your credit report, income, and your debt. They will either approve or reject the loan. Basically, all of the information that you gave in the prequalification needs to be verified. Upon approval you will be given a certificate or letter stating how much you are guaranteed to get, pending a satisfactory appraisal of the property, inspection, clean title report and executed purchase contract.
Having a preapproval before a shopping for a house is highly recommended for three main reasons:
- You show that you are serious and committed about purchasing a house and sellers will take you more seriously.
- It will save you time as well as disappointment later. You won’t waste time seeing houses that you can’t afford. Nothing is worse than falling in love with a property then to later find out that you will not qualify for the loan amount required to purchase the house.
- Some agents can use it as a bargaining chip for you with the seller. They will let the seller know how much you have been approved for and this may motivate the seller to adjust the price to make the sale. Also, if two offers come in on the same house, one is preapproved and one is not, the seller will go with the person preapproved because the deal will go thru faster. So get preapproved first.