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.
Difference Between Prequalification and Preapproval
When it comes to home loans and credit cards, the words “prequalified” and “preapproved” get thrown around a lot, but many consumers don’t know the difference between the two. Although they might sound like two different ways to say the same thing – you’re eligible for a line of credit – they’re actually quite different. If you’re wondering what the differences are and how they might affect your financial situation based on different offers you are eligible for, here’s the breakdown:
What Does Prequalified Mean?
Getting prequalified is much simpler than the preapproval process. For starters, you’re not required to give the lender access to your credit report at this stage of the loan or credit card application process. Instead, you’re expected to provide basic financial information, including your current assets, income, and liabilities (debts). This overview of your financial situation allows the lender to determine how much credit you qualify for.
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The prequalification process is a common procedure for anyone buying a home, but you can also check with your credit card provider to see if you qualify for a credit increase without it impacting your credit score with a hard pull on your record. Remember: just because you’re prequalified doesn’t guarantee you’ll ultimately get the loan or credit increase you’re applying for. It’s simply the first step to securing a loan or credit card, which is why credit card companies you’ve never done business with might be contacting you with prequalified offers even if you didn’t request that offer in the first place.
What Does Preapproved Mean?
Getting preapproved for a loan or credit card is much more involved because you have to allow the lender to access your credit report to determine if and how much you’re eligible for. You typically have to pay an application fee (if you’re applying for a mortgage loan) and submit a much lengthier application to get preapproved for an offer. When you’re preapproved for a mortgage loan, you’ll know how much you’re eligible to borrow from your lender, which could save time during the home-hunting process as you limit your search to properties you know you’ll be able to afford with the home loan offered to you.
For credit cards, a preapproval offer comes in when a company has checked your credit history (note: this does not equate to a hard inquiry on your credit report) and decided you have a good enough credit standing to be approved for the card they’re offering you (usually this is based on a set of criteria, such as credit score, payment history, and overall credit usage). The hard inquiry on your credit report comes when you directly apply for a new line of credit and too many hard inquiries (4-5+) can drag down your credit score, so it’s important not to apply for too many loans or credit cards in the span of 2 years (after 24 months, the hard inquiries drop off of your credit report).
Mortgage Application Documentation You’ll 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.
- 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.
How You Get Credit Card Companies to Stop Preapproving You
On another note – If you’re tired of credit card preapproval offers clogging your mailbox, then luckily there is a way to stop companies from prequalifying or preapproving you for their cards. According to the Federal Trade Commission, you can choose to opt-out of prescreened offers for 5 years or permanently. While credit bureaus and credit card companies claim that preapproved offers help consumers make decisions about applying for new lines of credit, the fact is: these offers can be seriously annoying if you’re getting them all the time! If you’re in this boat, then you might want to opt-out of prescreened offers for 5 years to test it out and if you don’t miss getting junk mail after that time frame, then go ahead and opt out permanently.
Prequalifying for an offer is easy, but getting preapproved is much more time intensive. Now that you know the difference between the two – and know how to opt-out if you don’t want these credit card offers anymore – you’ll be much better equipped to navigate the loan application process without making the classic consumer’s mistake of assuming prequalification means you’re guaranteed to receive the loan or line of credit you were offered in the first place.