If you are simply looking to
refinance, you won't need to be prequalified or preapproved for a
mortgage. But if you are looking to purchase a home, the first thing
you need to know is how much you can afford to spend.
By becoming prequalified or
preapproved for a mortgage, you have a good idea that you are able
to obtain a mortgage to purchase a home. Once you are prequalified
or preapproved, you can start seriously shopping for a
home.
Being prequalified or preapproved for
a mortgage shows the seller that you already have financing in
place. You obtain negotiating leverage and are looked at more
favorably by sellers. Plus, you know exactly what you can spend on a
house.
Prequalification
Prequalification is a rough estimate
of how you are standing for a mortgage. The mortgage lender will ask
you about your credit, income, assets and debts to calculate how
much you can afford to borrow for a mortgage. This process takes a
short amount of time, and most lenders provide the service for free.
The prequalification is not legally
binding. The lender is just estimating what you would be able to
borrow. It serves as an indication of what you could borrow.
Preapproval
The preapproval is one step further
down the road. This occurs after the lender contacts you employer,
your bank and other financial institutions to verify your income,
assets, debts and credit. Your credit report and score will be
considered at this step.
If you are approved, you will be
given a letter that says you are approved for a certain amount of
money for a certain amount of time. You may need to pay for the cost
of your credit report and application, but the cost will usually be
refunded or used towards your closing costs.
The advantages of being
prepared
When you are prequalified or
preapproved, you are more attractive to sellers and you save time in
the closing process. If you are preapproved, you won't have to waste
time applying for a mortgage after you find a home. You already
applied, you won't have to resubmit your information if you find a
home within the lender's preset time frame.
But if your financial situation
changes, you should contact your lender with the details. Lenders
will often recheck your employment and your credit history within a
week of closing, so it is best to be upfront about any changes.
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