Understanding Prequalification and Preapproval for Mortgages

by Hank Coleman

People can confuse prequalification vs. preapproval for mortgages when they are applying for a loan. However, there are noted differences. For example, to become prequalified, you must give a loan officer income and debt information to determine the loan amount you can manage. Preapproval, on the other hand, requires more information gathering and checking on the part of the lender. In other words, the lender must compile your credit report data as well as determine your debt to income ratio. Preapproval makes it easier for you to shop for real estate as you do not waste your time looking at homes you couldn’t possibly afford.

Not only is your credit history important when you are becoming preapproved so is the amount of time you have spent on the job and lived in your residence. Lenders do not like to see applications of potential borrowers who move or change jobs frequently. Usually, lenders prefer for you to have stayed in your current job for at least two years. And, of course, a good credit score, one that is over 750, can’t hurt either.

Mortgage Application Documentation You Will Need

When applying for a mortgage loan, you will need papers and data, such as:

  • Social security number(s)
  • Signed contract of sale
  • Your address
  • Employer name(s) and address(es)
  • Tax information from the past two years
  • Your most recent salary stub
  • Bank information – Names, addresses, account statements
  • Income earned from child support or alimony

Do Not Forget The Costs And Fees Of A Mortgage

You will also need to supply cash necessary to pay for the settlement costs. These costs generally include such expenses as the underwriting fee, processing, points, attorney’s fees, and many others.

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  • The underwriting fee – this fee is usually recorded as a flat charge or in terms of a percentage.
  • The fee for processing – this charge covers the basic processing expense, which includes the application fee.
  • Points – when you buy points, you buy down the amount you will be paying in interest. For example, two discounts points are equal to 2% of the loan total. Points can be paid initially or at the time of the loan settlement. If you buy points, you can save quite a bit on the amount you must remit in interest. They are also tax deductible.
  • Attorney fees – these charges are included in the administrative costs to cover the work of the attorney during closing. Attorney fees can significantly impact the overall closing costs as they can be well over $500.
  • PMI or private mortgage insurance must be paid if you obtain a loan where less than 20% is required for the down payment.
  • Title search charges and title insurance
  • Taxes due upon closing
  • Prepaid interest

It pays to know what documentation you will need as well as to understand the mindset of the lender if you want to become preapproved for a real estate loan. Take time to make a checklist of what you need to have ready when you apply. Put yourself in the lender’s shoes before you try to seek prequalification or preapproval in any loan deal.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.

Hank Coleman has written 578 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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