On Wednesday we talked about the importance of being prepared before shopping for a new home. A mortgage preapproval was repeatedly mentioned as an essential part of this preparation, and here’s why.
Most people have heard of both prequalifications and preapprovals, but there’s a big difference between the two. When you get prequalified for a mortgage, you talk to the bank and tell them about your income, assets, and debts. Based on what you tell the bank, the bank determines whether or not you would qualify for a mortgage loan. A prequalification doesn’t mean that you will, in fact, get a mortgage, because the bank hasn’t verified anything you told it. You could walk into your bank tomorrow, tell them you make a million dollars a year and have no debts, but that doesn’t mean it’s true.
On the other hand, a bank doesn’t issue a preapproval for a mortgage until it’s actually looked at your pay stubs, run a credit check on you, and otherwise does everything it needs to do to verify that what you’ve told it about your income, assets, and debts is genuine. With a preapproval, the bank not only confirms that it is willing to lend you money for a mortgage, but also how much it will lend you. This tells you exactly how much home you can afford, and better yet, it tells the sellers how much home you can afford. When you submit an offer on a home with your preapproval attached, the sellers know that the bank has examined your financial situation and confirmed that it will lend you enough money to purchase that home. Without that preapproval, the sellers have no way of knowing if you will be able to get the financing for the purchase, and no confidence that the sale can actually close.
It’s easy to get a preapproval from a mortgage broker or bank, so don’t skip this important step and make sure you have your preapproval in hand before you shop!