“Why would I go through the trouble of snagging a prequalification or preapproval if the bank will tear through my finances anyway?”
Getting preapproved isn’t a required step; bringing flowers on a first date isn’t a requirement either, but it sure goes a long way. Ultimately, you’ll look like a better loan candidate with a preapproval letter.
But first, don’t make the mistake of grouping prequalification and preapproval together- one is like riding a bike with training wheels and the other is jetting down the block on your pint-sized Huffy bike while your mom hollers, “Don’t go in the street!” behind you.
Prequalification: Your potential lender estimates how much of a loan you could qualify for based on general information that you provide. The lender takes your word on your salary and your credit score and gives you a maximum loan amount. It’s simple, and you can even get prequalified online. Because your prequalification isn’t based on a thorough look at your financial situation, you can’t approach your lender with a measuring cup and your prequal letter and say “Lend me some sugar, I am your neighbor!”
Prequalification is still a worthwhile step- you’ll know up front what you can and can’t afford before you start house hunting.
Preapproval: More official than a prequalification, a preapproval helps you walk the walk instead of talk the talk. Your lender estimates how much loan you qualify for based on the financial docs you fork over, which the lender verifies. Some of these docs include your credit report, W-2s, and bank statements. Once you’re preapproved for an exact loan amount, your lender backs up your offer letter by sending the seller’s agent a preapproval letter, conditionally committing the bank to your loan.
Having that preapproval letter doesn’t guarantee your offer will be accepted, but it does prove to the seller and the seller’s agent that you’re a serious and credible buyer. If you’ve met with a lender and weren’t preapproved, ask your lender how you can improve your financial picture to get that preapproval and become a competitive buyer.