Preapproval vs. Prequalification
A preapproval is your lender's written commitment to finance your home purchase up to a specific amount. Getting preapproved is a smart move for serious homebuyers because it shows sellers that you come to the negotiating table ready to complete the transaction.
A preapproval indicates that a lender has taken a detailed look into your financial background and has committed to lend you a certain amount of money, pending specific property details. Because preapproval includes a credit check, it's more powerful than a prequalification letter, which generally only estimates what you can borrow based on information you've provided.
What are the advantages of being preapproved?
Preapproval offers a number of advantages over waiting to apply for a mortgage until after you've found a home. It lets you:
- Shop for a home with the confidence of knowing exactly how much you can borrow.
- Take advantage of the preference many home sellers have for preapproved buyers.
- Find out about possible qualification problems early in the homebuying process.
- Avoid the hectic rush to find the right mortgage loan at the same time that you’ve found a house.
Who can benefit the most from preapproval?
Preapproval is a great advantage for anyone buying a home, but it can be especially useful for buyers looking for their first home and those who are self-employed or work on commission.
- First-time homebuyers. Without a record of previous mortgage payments, sellers may see first-time homebuyers as less likely to obtain financing than a similar buyer who's already demonstrated the ability to meet a monthly mortgage payment. A preapproval helps even the field by showing the seller that a lender has already run the numbers and is willing to proceed with the transaction.
- Self-employed buyers or commissioned employees. Because their incomes may fluctuate more dramatically, self-employed and commissioned buyers often lack the financial documentation of salaried employees, which can send up a red flag to some sellers. Showing that a lender has already considered these factors will help mitigate this risk.
