Standing out in a large pool of buyers may seem daunting, especially if you’re not in a position to be a “cash buyer.” To demonstrate your commitment, you can go through the prequalification or preapproval process before you shop. But wait! Why are there two “pre” options? Do you need to do both? Is one better than the other? Let’s take a closer look at the difference between prequalification and preapproval.
What’s a Prequalification? In short, a prequalification is an estimate of how much home you could probably afford. This estimate is mostly based on an informal evaluation of your financial situation that doesn’t require you to provide documentation or have your credit checked. The process varies by lender but could include your verbal communication of income, credit, debt, and assets.
A prequalification is an excellent tool if you’re a first-time homebuyer. Going through this process will help you determine your financial readiness and expose you to the different home loan options. You can use this information to adjust your budget and decide whether you should pay down more debt before moving forward or starting the preapproval process.
Getting Preapproved. A preapproval is essentially applying for your Home Loan. Most lenders will require that you provide documentation of your income, assets, and debts, confirm all borrowers’ employment status, and run credit. Unlike the prequalification process, your lender can give you a concrete idea of how much home you can afford.
To ensure you’re comfortable with the monthly home loan payment calculated by the preapproval, you should compare it to your budgeted calculation using the 25% rule. Taking this additional step will help ensure you’re looking at homes within your budget. To learn more about the costs of homeownership, visit this blog post.
Keep in mind that a prequalification is not a mortgage guarantee. An underwriter must review your application for you to receive a preapproval. A prequalification is a great tool to help you know specific details about home loan limits early in the home shopping process, which will save you time and heartache. Preapprovals are only good for 120 days, so you’ll want to make sure you are ready to buy before beginning the application process.
If you are ready to take the next step toward homeownership, we’re here to provide resources and tools to help you along the way. If you’d like more information about homeownership, check out this Achieve Financial Success playlist or download our Homebuyers Guide. To get started, schedule a call with one of our Real Estate experts.
Subject to approval. Restrictions may apply. Yolo Federal Credit Union is an Equal Housing Lender. NMLS# 401954