Preapproval and Prequalification in the Mortgage Loan Process

The Difference between Prequalification and Preapproval

Prequalification and preapproval are the first steps in the formal mortgage application process. You must be prequalified before you can be preapproved. Prequalification determines an approximate mortgage loan amount. Preapproval determines the maximum amount that you can borrow for the mortgage loan.

'Home'work

You have most likely figured out by now that every step of the home buying process requires homework. Prequalification and preapproval is no exception. Your assignment here is to gather documentation to submit to prospective lenders. As a rule of thumb, mortgage lenders generally request the following documents for the last three years:

Federal and State Income Tax Returns
W2's
Child Support or Alimony Records
Self-Employed Business Records and Tax Returns

The mortgage lender might also ask you to provide current information, such as:

Driver's License
Social Security Card
Birth Certificate
Current Pay Stubs
Bank Statements
Credit Report
Records Showing Paid Derogatory or Erroneous Credit History

Prequalification Analysis

Prequalification is an initial informal analysis performed by a mortgage lender. It is an opinion based on information that you provide to the lender. In the prequalification analysis, information you provide is not verified. Prequalification can be done over the phone, at the lender's web site, or at the web sites of real estate agencies. You can obtain a prequalification letter by calling a mortgage lender or filling out the requested form on the lender's web site. The prequalification analysis is a free service with no strings attached.

Preapproval Analysis

After you have been prequalified, you will want to obtain preapproval from a mortgage lender. The information you provide a lender for the preapproval analysis is verified and is the foundation for the formal mortgage loan application. A preapproval letter is a formal agreement that guarantees a loan of a determined amount to a buyer. The preapproval analysis generally requires a fee but this does not mean you are bound to that lender.

The Importance of Prequalification and Preapproval

Prequalification and preapproval is essential for you, your Realtor®, and potential sellers.

Prequalification and preapproval begins the formal mortgage application process for you. Because of the analyses, you can breathe easier knowing you will be approved for a mortgage loan and the maximum amount of the approval.
Prequalification and preapproval gives your Realtor® the financial parameters for a home search.
Prequalification and preapproval lets the seller know that a potential sale can be smooth sailing because the buyer has done their homework. You are a step ahead of a buyer who is not preapproved.

A Word of Caution

Keep in mind that the preapproval is the maximum amount that the lender feels you can afford. It is wise to buy a house with a slightly lesser value. You will then have extra income available to factor in closing costs, unexpected purchases needed for the home, and increased monthly expenses, such as utilities or maintenance and upkeep.

Prudential California Realty
181 Old Springs Rd. . Anaheim Hills, CA 92808
direct (714) 283-6653 . fax (714) 283-6655
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