The Difference Between Prequalification and Preapproval
Some people use the terms interchangeably, but prequalification and preapproval are different and increasingly important steps in the mortgage and home-buying process.
This does not mean you have an approved line of credit; instead, prequalification is merely a way to assess what a lender might give you based on your accurate data. Nothing is verified, but it's a good tool to use to get an idea of how much house or property you'll be able to afford. Some online lenders will give you such a number within a few minutes in exchange for your contact information.
Always ask lenders if the loan they're offering you has a prepayment penalty. If the answer is yes, walk away. Prepayment penalties limit your ability to extinguish a loan entirely if you choose. They restrict you from lowering your interest cost and overall principal and also limit your ability to refinance if you want a lower rate.
You've probably heard that real estate brokers like to hear that a potential buyer is preapproved for a loan. In recent years, however, even real estate brokers have become skeptical of these preapproval letters since some potential borrowers have inflated their income or other figures, a deception that is discovered in the actual application process.
When you're searching for your first house, you probably won't need a broker. Most first-time homebuyers tend to scour real estate listings and open houses for choices. In those cases, the seller's broker picks up the whole commission that the seller pays.
Always investigate how your qualifications for getting a mortgage will affect every stage of the home buying process. Hiding your financial history from lenders, real estate agents, real estate attorneys, or your financial planners not only slows down the process, it's a mark against your character.
