There Are Many Steps in the Homebuying Process. Two of the Most Important Are Actions You Take Before the First Tour Begins.
If you're a newcomer to the home buying process or haven't tested the market in some time, starting a new home search can prove exhilarating. However, before stepping foot inside any potential new home, it helps to know just how much of that investment you can afford. Or, more precisely, for how much of that investment you are approved.
Let's take a look at prequalification and preapproval and how they both work in your favor.
What is Prequalification?
Prequalification entails you, the buyer, to discover how much you're able to borrow for your home purchase. Prequalification uses basic information you provide to a lender, including your current financial situation, to render a decision.
Prequalition occurs very early on in the homebuying process. For many, it's one of the first steps they take in the journey. It's an excellent opportunity to discover what you can afford and which mortgage programs might best suit your needs.
What You Need to Provide for Prequalification
The requirements for prequalification are straightforward. A lender makes their determination based on:
- Bank account information
- Overall financial health, including debts and assets
- Credit check
It's not a deep dive, but rather more a general assessment of your financial stability.
In many cases, the prequalification process happens remotely, either online or over the phone with your lender. You can expect a decision in one to three days. Many lenders won't charge you for the service.
Benefits of Prequalification
A relatively simple process, prequalification nudges you along the path towards homeownership. It provides you—and more importantly, your lender—a good idea of what you're able to borrow.
This leads to a more informed search as you narrow down your choice of homes. And while it's not necessary in all cases, in many markets, a seller will want to see a prequalification letter alongside any offer.
What is Preapproval?
In basic terms, preapproval is the next step up from prequalification. It is far more involved and places you much closer to buying a home.
Whereas prequalification provides you an idea of your borrowing range, preapproval means a lender has deemed your creditworthiness is such that you can lock in an interest rate, make serious offers on homes, and streamline the closing process.
What You Need to Provide for Preapproval
As it's a more conclusive assessment of your ability to purchase a home, preapproval can get very detailed. It requires completion of a mortgage application, as well as the following information:
- Pay stubs for income verification
- Bank statements
- Monthly debts
- W2s and tax return from the previous two years
- Credit check
Typically, you'll receive a determination within 7 to 10 business days. In many instances, you'll pay an application fee. In return, you receive a fixed loan amount, including specific interest rate information.
Benefits of Preapproval
Excuse the cliche, but this is where the rubber meets the road in the homebuying process. With preapproval in hand, you place yourself at a distinct advantage over others in the market—particularly those with just a prequalification.
You can make concrete, confident offers on homes. Sellers are more apt to consider a preapproval versus a prequalification, as the former is much closer to closing on the home. This can be invaluable when house hunting in an extremely competitive market.
Where you are in the homebuying process determines if one approach serves your needs more than the other. If you're wading into the market and unsure if you're ready to buy, prequalification is a good starting point. It will help you set a budget, narrow down viable neighborhoods or home types, and allow you to take advantage of opportunities should they arise.
However, if you're a serious buyer and ready to make an immediate move when the right property comes available, preapproval is the way to go.
Ready to sell your current home or in the market to buy and make your next major move? Contact Prema Subramaniam
today and let her be your guide to East Bay luxury homes in Danville, Dublin, and Fremont, California.