Homebuyer 101: Prequalification vs Preapproval

4 minute lesson

Lesson Summary

• Introduction to Key Terms: Clarifying the often-confused terms in home buying – “prequalification” and “preapproval”.
• Understanding the Difference: Exploring the true distinction between prequalification and preapproval in mortgage processes.
• Prequalification Explained: An initial assessment of borrowing potential based on self-reported financial information, without detailed verification.
• Preapproval Process: A more in-depth evaluation including credit checks and employment verification to assess home loan eligibility.
• Consumer Financial Protection Bureau’s View: Emphasizing the importance of the details behind a prequalification or preapproval letter over the terminology.
• Impact in Home Buying: How both prequalification and preapproval can enhance your credibility as a buyer in the real estate market.
• Expiration Date: The validity of your preapproval is more dependent on situational changes than a fixed time frame.
• Conclusion and Local Expertise: Importance of understanding these terms for Colorado Springs homebuyers and the support offered by 719 Lending.

When it comes to purchasing a house, navigating through financial jargon can be quite daunting. Two terms that often create a lot of confusion are

prequalification

and

preapproval

. The confusion stems from the fact that different people, be it real estate agents, banks, or loan officers, interpret these terms differently. Furthermore, a simple Google search can throw up a thousand different answers, increasing the confusion. However, the reality is that the difference between the two is not as significant as it may seem.

The Consumer Financial Protection Bureau (CFPB), the governing body for all financial matters in America, has determined that what truly matters is not the terminology used in the letter, but the details behind it. This article aims to clear the air and provide a comprehensive understanding of these two crucial home-buying terms.

Prequalification and Preapproval: What’s the Difference?

Whether you are issued a prequalification or preapproval letter, the essential question you need to ask is what the loan officer did to issue you the letter. For instance, did the loan officer simply have a conversation with you, during which you disclosed your income and debts? Or did they conduct employment verification, run you through the Fannie Mae system, verify your employment, and gather proof of income and assets? The amount of work put into that prequalification or preapproval letter is what truly counts.

Prequalification: An Initial Assessment

A prequalification is essentially an initial assessment. It’s the first step in the mortgage process, where the lender estimates how much you might be able to borrow based on the financial information you provide, such as your annual income, debts, and assets. However, the lender doesn’t verify these details with a credit check or other means and instead takes your word for it.

Preapproval: A Deeper Dive

A preapproval, on the other hand, involves a more detailed look at your finances. Unlike prequalification, preapproval includes a thorough credit check and employment verification, assessing your ability to pay for a home loan. The lender will verify all the information you provide, including your income and assets, and may also run you through the Fannie Mae system.

The CFPB’s Stance on Prequalification vs Preapproval

According to the Consumer Financial Protection Bureau, the specifics behind the letter are more important than the terminology used. Therefore, when you receive a prequalification or preapproval letter, you need to delve into what it really signifies.

Does the preapproval mean that the lender ran you through the Fannie Mae system to get this approval? Does it mean that an underwriter looked at it? In this industry, where varying opinions and verbiage are common, you may encounter one person who says a prequalification is better than a preapproval, and vice versa. It’s important to understand the nuances, especially if you’re considering specialized products like an FHA loan, VA loan, or jumbo loan.

Impact on Home Buying Process

Regardless of whether you have a mortgage prequalification or preapproval, both can be beneficial during the home buying process. These letters let sellers know that you are a serious buyer who is likely to secure financing. In fact, many sellers require a mortgage prequalification or preapproval letter before accepting an offer on a house.

Expiration Date

Let’s talk about the expiration date of a pre-approval or pre-qualification letter, a topic that’s often misunderstood. These letters typically come with expiration periods like 30, 90, or 180 days. However, the truth is more flexible. Their validity can change in an instant if there are significant shifts in interest rates, your credit profile, or your assets. The bright side? As long as everything stays consistent – your job, underwriting guidelines, assets, and interest rates – your pre-approval letter doesn’t really have a set expiration date. It’s less about the ticking clock and more about whether any of these key factors change.

Wrapping Up

While the terms mortgage prequalification and preapproval are often used interchangeably, it’s crucial to understand what they mean and how they impact your home buying journey. Always remember to ask your loan officer about the specifics behind your preapproval letter and what it means for you.

If you have any questions about preapproval letters, particularly how we at 719 Lending in Colorado Springs issue them, don’t hesitate to call us. We’re always happy to walk you through all the details to ensure you have a clear understanding and can make informed decisions.

When it comes to purchasing a home, knowledge is power. The more you know, the better prepared you’ll be to navigate the world of home loans in Colorado Springs and make the dream of homeownership a reality. Partnering with a reputable mortgage lender in Colorado Springs can provide you with the resources and guidance needed to secure a Colorado Springs mortgage that fits your needs.