Wednesday, March 7, 2007

Prequalification vs. Preapproval

Copyright © Chantal McBride
http://www.WebTD.com


You can use two techniques to get a lenders opinion of your creditworthiness as a borrower. One is generally the better way to go while the other is potentially a waste of your time and money and can be incredibly misleading.

We will begin with the second method which is the prequalification method. This method is nothing more than a conversation with a loan officer in which they ask some questions about some basic financial matters such as your present income, expenses, and savings for a down payment. The loan officer then guesstimates approximately how much a lender might lend you at the current interest rates assuming everything you have said is accurate. Prequalification is fast and free.

Loan preapproval is much more involved and accurate than the prequalification process. The preapproval process involves a thorough investigation of your credit history. The lender reviews all necessary documents to verify your present income and expenses, the amount of cash you have on hand, assets and liabilities, and even your prospects for continued employment. This could take up to a week or two, but it is time well spent. Once preapproved for a mortgage loan you have two huge advantages.

You know exactly how much you can borrow. It’s almost like having a line of credit to go house hunting with. The amount you have been preapproved for is written on paper, but the lender will not give you a firm commitment on your loans interest rate until you have a signed contract to buy your new home. If the interest rate fluctuates while you are looking for your home, the amount that you have been preapproved to borrow will also change.

You have an advantage in multiple offer situations. If you are competing with other buyers to buy a property, being preapproved is proof to the seller that you are a real buyer. Your offer will be considered more seriously than those who have not bothered to prove their creditworthiness.



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