Prequalification vs Preapproval for Mortgage: What's the Difference?
When you put your home up for sale, it's not all that uncommon to quickly receive offers from multiple potential buyers. Some of these buyers may say they've been prequalified for a loan, and others might talk about being preapproved. The difference between prequalification vs preapproval says a lot about the strength of a buyer's offer on your house. So how do you determine which offer you should more seriously consider?
Selling a home can be a lengthy, time-consuming process. Few things are as frustrating as accepting an offer, only to have the deal fall through a few weeks later. And as a seller, you can't afford to spend your time on buyers who aren't committed or financially able to complete the process. One key way to weed through your options and really be able to determine who might be the most reliable buyer is by understanding the difference between being prequalified or preapproved.
What does Prequalified for a Home Loan Mean?
Prequalification is the preliminary process in which a lender estimates the mortgage a buyer might be eligible for. This process seldom involves more than a brief conversation with the lender and a quick estimation of the potential buyer's financial status. Because they don't need to submit real financial documentation or go through a credit check, a prequalified buyer doesn't have any guarantee of actually receiving a loan once you accept their offer. If their financial status changes, or if more information is revealed, the lender may choose not to make a final offer for a home loan.
Prequalified buyers know how much they might be able to spend, and they use this information to start shopping for a home in their price range. The lending company is interested in learning more about them and thinks they may be a good candidate for a mortgage. As offers start rolling in, keep in mind that those made from prequalified buyers don't carry a lot of weight; until the lender has officially agreed to a mortgage, the deal could fall through at any time.
What does Preapproved for a Mortgage Mean?
To be preapproved for a home loan, buyers essentially are just going through the loan application process. Potential buyers fill out paperwork, submit financial information and undergo a hard credit check. The lender uses this information to complete an in-depth financial analysis and decide if the buyers qualify for a mortgage. If the lender is satisfied with the buyer's ability to repay the loan, they make a conditional offer that includes an amount and an interest rate.
If a buyer is preapproved, they have already undergone this process. This shows that the buyer is committed to their offer and capable of closing the deal on their new home. Preapproval is almost as good as having money in hand - unless something major changes during the escrow process, the lender is ready to offer the loan.
How Do They Differ?
The difference between preapproval and prequalified is actually quite simple: preapproved buyers have a lender backing them, while prequalified buyers do not. In the simplest of terms, preapproved buyers have already been approved for the loan. The lender has thoroughly analyzed their credit, debt-to-income ratio, timely payments on existing loans and ultimately determined that they can uphold a mortgage. Preapproved buyers can make a strong offer because they know they can back it up.
Prequalified buyers are still in the very early stages of purchasing a home. They have an idea of how much money they can spend, but they haven't gone through the necessary steps to secure their loan. Once a prequalified buyer completes the preapproval process, they may find that the mortgage they're eligible for is actually much smaller than they initially thought.
Prequalification is a preliminary step to preapproval. Credit checks and financial analysis cost the lender both time and money; by prequalifying candidates, they can narrow the pool and only complete paperwork for buyers who are legitimately serious about purchasing a home.
Prequalified vs. Preapproved Buyers?
If you have offers from both prequalified and preapproved buyers, you should always consider the preapproved offer first. Preapproved buyers can make an offer with the strength of a lending company behind them. They have already completed paperwork, know what their monthly payment and interest rate are likely to be and they are presumably shopping for homes they know that are within their price range.
Lending companies prequalify and preapprove candidates to take as much guesswork out of the process as possible. If a buyer has been preapproved, they've already finished a large portion of the paperwork a mortgage loan involves. Once you accept a preapproved offer, the buyer's lender can immediately assess and evaluate your home and make a final decision. This is known as the loan commitment process - the lender double checks the preapproved candidate, makes sure your house fits the agreed budget and from there the deal moves forward.
When you receive an offer on your home, check first to see whether the buyer has been prequalified or preapproved. If they are just prequalified, you can request that they make a new offer after they complete the approval process. By only accepting strong offers from preapproved candidates, you can greatly reduce the risk of the deal falling apart halfway through the process.
The strength of a buyer's offer depends on how much certainty they bring to the table. Preapproval is a strong sign that someone is a reliable buyer. As a seller, sticking to offers from preapproved buyers can help you protect your interests and finish the sale as smoothly and painlessly as possible.
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