The process of searching for a new home is exciting and invigorating. What if you could have a bargaining edge when negotiating with the borrower once you find your dream house? You might have that power at your fingertips if you could show the borrower that a bank has already agreed to work with you for your mortgage loan. There are two ways to do this – with a mortgage prequalification or a preapproval.
Prequalification vs. Preapproval
When a mortgage broker or loan officer prequalifies you for a mortgage, it’s an informal process where he’ll make some calculations to determine if you meet the financing guidelines. It doesn’t mean you will qualify — it simply provides you with an idea of the loan amount that your current financial picture will allow you to obtain, as long as the information you provide can be verified.
Preapproval, on the other hand, is a more formal process, where you actually apply for financing. The lender pulls your credit report, and assesses the information in your file, even if you don’t yet have a home chosen. Preapproval is binding for a specific time — usually 30 to 90 days — so that when you do find a home, the lender must only process the items related to the home, such as the appraisal and title work.
Is the prequalification process worth it?
Most real estate and mortgage professionals agree that it is. First, it provides you with an idea of how much of a mortgage the bank will be willing to lend you. This serves as a helpful guideline to let you know the price range of homes you should be looking at when you go house hunting.
Second, prequalification is a bargaining chip that you may be able to use to your advantage when submitting an offer on a home. When you, as a prequalified buyer, are up against a buyer who doesn’t have a mortgage relationship with a bank, the seller is more likely to look favorably upon your offer. However, because it’s not binding, it may not hold as much weight in the seller’s eyes as a preapproval does.
Obtaining a Prequalification
Call your lender and let them know you want to prequalify. They’ll run through a quick questionnaire with you, and use the information you provide to calculate some qualifying ratios to let you know where you stand. They’ll then provide a letter that states the amount of the mortgage that you’re prequalified to obtain. When you find a home, however, the lender is not required to extend a mortgage.
Prequalification provides you with direction in the mortgage process. At the very least, it gives you an idea of how much financing you can obtain. At best, it provides you with the price range of homes you should be viewing. It also provides a slight bargaining chip to use with sellers, so that you’re ready to hit the ground running when you find the home of your dreams.