Why
There is a straightforward explanation as to why it is important to get prequalified prior to engaging with a real estate agent. By obtaining prequalification, you are demonstrating to the agent that you are genuinely interested in purchasing a property, and that your fundamental details align with the essential criteria for securing a mortgage. Additionally, prequalification provides you with an estimate of the potential mortgage amount you could be eligible for. These factors hold significance for both you and your agent, preventing any unnecessary time wastage or false hope in pursuing a home that may be beyond your qualifications.
How
How do you get yourself prequalified? First, you gather various documents that will support your preliminary mortgage application. The reason we say “preliminary” mortgage application is because there is no present available home address to consider for purchase at this time. As to the documents that you need to gather, this will depend on your individual situation. To get an idea of which documents, please refer to our Loan Product page.
To be a bit more specific, you would be providing documents that would support the following areas:
Residence, Employment, Income, Assets, Credit.
Here is a brief explanation on each area:
Residence:
What: Showing where you live and how long you have lived there.
Why: Shows that you either have a longevity or unstable residence history
Goal: To show that you have lived at an address for long periods of time
Employment:
What: Showing where you work and how long you have worked there
Why: Shows that you either have a stable or unstable employment history
Goal: To show that you have a stable employment history
Income:
What: Showing what your average income is over a specific period of time
Why: Shows either having a stable and increasing or an unstable or decreasing income
Goal: To show that you have a stable and increasing income amount
Assets:
What: Showing what your present liquid asset value is and that you have had it for a while
Why: Shows that you either have a savings habit or you do not save
Goal: To show that you have a savings habit and that you have reserves in case of any issues
Credit Reports:
What: Your credit report from the 3 credit bureaus
Why: Shows either you can handle credit with your payment history or lack of
Goal: To show that you are capable of handling your bills in a timely manner as agreed upon.
Getting prequalified is simply when you inform your loan officer verbally, of the general information above. Getting preapproved is when you provide the above documents along with the preliminary mortgage application. The difference between being prequalified and preapproved is the information. Verbally provided or documents provided along with the application is the physical difference between the two. Now, as to which one is more credible is simple.
Providing your documentation along with the preliminary mortgage application is stronger than just giving verbal information. Any realtor that asks you to provide a “Prequalified Letter” is a sign that they are new to the real estate industry.
Why? Chances that anything can go wrong and the likelihood that it will go wrong is very high. A realtor that asks for a Preapproval Letter is a seasoned realtor. A “Preapproval letter” means, to a realtor and seller, that you have already provided the documentation and the likelihood of running into any issues, is very low.
You have probably heard of many problems that happen at the last minute when purchasing a home., More than likely, the realtor took that buyer shopping before they even dealt with a loan officer or the buyer only got themselves prequalified. Here are some examples of what could go wrong when working solely from being Prequalified:
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- Your credit report shows collections and charge-offs that you did not disclose.
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- Your income declined from previous years which means you have less buying power.
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- You do not have enough cash to close with. ( This is the most common problem)
Being proactive is in your best interest. Doing 90% of the prep work will ensure a greater chance of closing on your new home.
Here are the Frequently Asked Questions people ask when planning on buying a home:
1. How do I know if I prequalify for a home?
Answer: Contact a seasoned mortgage loan officer
2. What does a lender use to prequalify you for a mortgage?
Answer: A lender uses your verbal information whereas, once approved preapproved, they use the supporting documentation.
3. Which is better: preapproval or prequalified?
Answer: Being PreApproved is stronger than being PreQualified
4. Does prequalification include a down payment?
Answer: Verbally yes while a and preapproval includes your verified assets (like bank statements)
5. Can prequalification negatively impact your credit?
Answer: No.
6. How long does it take to get prequalified for a home loan?
Answer: Getting prequalified is simply a telephone conversation, whereas preapproval depends on how long it takes to provide documentation to the loan officer.
To Summarize:
To get Pre-qualified is a very simple verbal information gathering by a loan officer from your conversation with them. The loan officer will do calculations based on your verbal information and then determine if and how much your qualify for. Getting Pre-approved is when you complete a preliminary mortgage application and provide the required supporting documentation along with the application. The mortgage loan officer will calculate the numbers on your behalf and then provide all to a lender’s underwriter to review and document the approval along with the terms that you be offered.
Getting preapproved is when you complete a preliminary mortgage application and provide the required supporting documentation along with the application. The mortgage loan officer will calculate the numbers on your behalf and submit the documents to the lender’s underwriter for approval, and the terms that you are offered.
Overall, being prequalified has a higher chance of having problems and a lesser chance of closing vs being preapproved has a lesser chance of having problems and a higher chance to close. Overall, being prequalified will cause you a lot more stress because of all of the unknown vs being preapproved has less stress because of all of the documentation.
