September 29th, 2018 11:04 AM by Jackie A. Graves
Before you can buy
a house, you have to know how you’ll pay for it. For 88 percent of
homebuyers, that means financing the purchase with a loan, according to the
National Association of Realtors' 2018 Home Buyer and Seller Generational Trends Report.
There are two options to find out what a bank is willing to lend
you, as long as everything checks out once you’ve picked a house:
prequalification and preapproval.
Prequalification. Having a prequalification letter from a lender means
you’re conditionally approved to purchase a home up to a certain price, based
on basic information about your income, debt and how much you have saved for a
While prequalification doesn’t require the documentation and proof of funds
needed for a preapproval, it’s particularly helpful for homebuyers who have no
idea about their budget for a home. “Prequalification gets them in a position
to shop,” says John Pataky, executive vice president at TIAA Bank.
Preapproval. With preapproval, you’re providing the details about your employment
and financial information and letting the lender pull your
credit history to learn more about you as a borrower. A preapproval means the
lender is stating confidence in lending you a certain amount of money to
purchase a home, pending any issues with the house itself or unforeseen
circumstances with your finances.
While the differences between preapproval and prequalification
are merely a matter of reporting financial information versus providing
documentation for it, a preapproval letter can be far more powerful when it
comes time to place
an offer on a home. That's because with preapproval, the seller
has proof of your lender's confidence in you as a borrower. While
prequalification makes it easier to shop for a home you can more realistically
afford, preapproval gives you the strength to negotiate a purchase price,
Brian Simmons, founder and CEO of Ask a Lender, an online
platform to help consumers shop lenders and loans and get financial advice,
echoes the preference for preapproval: “One of the first things a buyer should
do when they begin looking at homes is getting preapproved for a mortgage.”
If your local
housing market is seeing frequent bidding wars and multiple
offers on houses, a preapproval could help keep you from being overlooked by
sellers who have many options to choose from when it comes to sale terms and
price. Still, there are times when prequalification may be your best option to begin
Here are five things to keep in mind as you decide whether
prequalification or preapproval is the best move for you.
To shop lenders, prequalify. You may not have decided on the
lender you’d like to work with yet, and shopping around by inquiring with three
lenders or so is always recommended. Rather than just talking to a loan officer
programs, you can use the prequalification process to gauge how much
a lender would be able to lend to you. Of course, don’t base your choice of
lender solely on the maximum price you prequalify for. Also consider what
terms, rates and other details will best suit you in the long run.
Don’t get preapproved by too many lenders. Preapproval
includes a full review of your financial background, including your credit
history. As a result, that inquiry is noted in your credit report and can
negatively impact your credit score if you have too many recent checks into
your credit history.
“It doesn’t necessarily reflect well on you,” Pataky says. If
which lender you want to work with, ask more questions and
consider trying out prequalification first, then apply for preapproval once
you’ve made your decision.
Neither guarantees a rate lock. The interest rate
on your mortgage may be a deciding factor in whether you can afford a certain
house. But your ability to secure a desirable interest rate through a rate
lock, which guarantees your rate will not increase over a set time period –
typically between 30 and 90 days – often only happens when you’ve found
the house you want to buy.
Rate locks vary based on lender practices, but prequalification
rarely offers a rate lock, and preapproval often
doesn’t include a rate lock until you’ve identified the house you wish to
purchase – or even until the seller has accepted your offer.
Ask your lender what’s required to ensure a rate lock and how
long that rate lock lasts. In many cases, the lock is limited to 30 days, which
is just enough time to get through the contract period on a house.
Preapproval still isn’t a done deal. Even if your
lender is impressed by your salary and pristine history of paying off debt, no
preapproval is a guarantee that a mortgage will be approved once you’ve found
the house you want. There are still other factors at play, the first of which
focuses on whether your financial situation has changed.
“The factors by which you were preapproved have to be
maintained,” Pataky says. That means not quitting your job, not buying a
Maserati to keep up with the Joneses in your new neighborhood and not opening
up five credit cards in the last two weeks, he explains.
Another factor standing between you and mortgage approval is the
house’s condition and appraised
value. Even if you’re preapproved to buy a house for $400,000 and
agree to that same price with the seller, if the house appraised for only
$375,000, your lender will likely only approve you for a mortgage on the house
at $375,000. You’re then tasked with trying to renegotiate on price with the
seller, coming up with the extra cash on your own or starting
your search for a home all over again.
Keep asking your lender questions. Even if you’ve
bought a home with a mortgage before, it’s likely been at least a few years,
and the process will feel different. At every step of the way, you shouldn’t be
afraid to ask your lender about expectations, timing and documents you should
have ready to help streamline the process as much as possible.
“During the preapproval process, the buyer will need to provide
some of the documentation their loan officer will use when it’s time to
underwrite the loan,” Simmons says. “This is a good opportunity to ask the
lender questions about the process and get a checklist of documents the lender
will need, such as pay stubs, bank statements and tax documents.”
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