Fully understanding the real estate loan approval process gives you an edge as a seller when it comes to negotiating with buyers. The key is knowing what different types of approvals mean and how they impact your potential buyer’s likelihood of getting final approval on their mortgage loan. So what does prequalification mean, how is it different than preapproval and what else do you need to know? Let’s take a closer look.
What Does Prequalified Mean?
Getting prequalified for a real estate loan is something buyers should do before they even start looking at listings. Why? Because it gives them a ballpark idea of what their budget should be. Buyers who are prequalified have not applied for a loan yet. They have simply asked a lender to review their financial status to determine if they could get a loan for a home. This step of the process is a no-risk tool buyers can use to determine how much money a lender might let them borrow.
How it Works:
- Buyers can apply for prequalification online or over the phone by providing general financial information to a lender of their choice.
- Financial details considered can vary somewhat, but they typically include salary information, the number of incomes being considered for the loan and the credit worthiness of the borrower(s).
- There is no verification process at this stage. It is solely up to the buyer to provide an accurate picture of their current financial situation to the lender.
- After the information has been received, the lender will give the buyer an initial estimate on how much of a loan they could potentially qualify for.
- Buyers can use free online prequalification calculators to generate an automated loan estimate.
Based on the above information, you can see why it’s not typically in your best interest to entertain offers from buyers who have been prequalified but not preapproved for a loan. The process for prequalified is too loose.
Now, let’s take a look at the next step, preapproval.
What Does Preapproved Mean?
Getting preapproved for a real estate loan should be the first step a buyer takes before they start viewing homes and talking to sellers. A preapproved buyer has applied for a loan through a lender and the lender has determined that they will probably approve a loan for a certain amount. At this stage, the loan is still not guaranteed, but the lender is confident, based on validated information collected from the buyer, that the approval process will go smoothly.
How it Works:
- Buyers complete a mortgage application and pay a fee for financial and credit checks. Financial documents, like tax forms and pay stubs, are provided in order to prove income, account balances and existing debt.
- The lender verifies the information they are given and may ask for more documentation to fill in any holes found in the background and credit checks.
- The lender then tells the buyer the exact amount of money they are preapproved to receive for a mortgage. Once preapproved, buyers can start confidently looking for homes within that approved price range.
- Sellers know that preapproved buyers are serious and the odds they’ll get final loan approval are much higher than those who are simply prequalified.
If an offer comes in from a preapproved buyer, you can have much more confidence in knowing that they’re ready to move forward with a purchase and their likelihood of being financed is very good.
Now that we’ve talked about prequalification and preapproval, let’s take a look at the final step buyers must take to secure mortgage loan financing – underwriter approval.
What is Full Underwriter Approval?
Once a buyer and seller have mutually agreed on the price and terms of a real estate sale, and an offer has been accepted, the loan application goes to the lender’s underwriter for final approval. An underwriter is an entity working with a lender who makes the final decision on whether a loan will be approved.
- There are four possible loan application outcomes: full approval, conditional approval (the most common), suspended for more documentation and denied. Check out this loan approval post for more information on each of the four outcomes and learn how they can impact your sale.
- Buyers don’t have to wait until an offer is approved to request underwriting. They also have the option to send their preapproval documents to the underwriter before making an offer on a home. In this circumstance, the underwriter will review the documents as if a home were already under contract. This is a good strategy for buyers to use to be considered over other potential buyers in a hot sellers’ market.
Knowing the difference between prequalified and preapproved loans and fully understanding the mortgage lending process is important for sellers. Doing so allows you to understand your risks and to ask the right questions to determine if potential buyers are willing and able to move forward with a home purchase.
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