While looking to buy a home, you will likely encounter terms that banks use interchangeably, such as prequalification and preapproval. However, these words do not denote the same meanings. You might think you have a mortgage in hand when you still have not received final approval for one.
To figure out when you can be confident that you have the financing for a home, you should possess a clear understanding of the stages that actually get you to mortgage approval.
The pre-qualification stage
Prequalification is the initial step in the mortgage approval process. During this stage, you provide basic financial information to a lender, such as your income, assets and debts. Based on this information, the lender gives you an estimate of how much you may be able to borrow.
Prequalification is typically a quick and informal process that you can complete online or over the phone. This does not guarantee loan approval, though. It is simply an estimate based on the information provided.
The pre-approval stage
Preapproval is a more thorough assessment of your financial situation by a lender. To get pre-approved for a mortgage, you will need to submit documentation such as pay stubs, tax returns and bank statements. The lender will also check your credit score during this stage.
Preapproval gives you a clearer picture of how much you can borrow and shows sellers that you are a serious buyer. Still, while preapproval is a significant step toward securing a mortgage, it does not get you over the finish line.
Once you have found a home you want to purchase and the seller has accepted your offer, a bank or other lender will conduct a thorough review of your financial documents and the property. This process may take several weeks while the lender verifies your income, employment status, credit history and the appraisal of the property. If everything checks out, the lender will issue a formal approval.
Knowing where you are in the mortgage approval process can keep you from pushing forward with a home purchase when you are not ready to do so. You may also avoid legal disputes that drag out the sale.