You’ve probably heard this one: A home is the biggest — and most important — purchase of your life. Although that bit of conventional wisdom may be enough to cause even the coolest homebuyers to break out in a nervous sweat, this process doesn’t have to be the most complicated you’ll ever face.
Securing a mortgage preapproval letter or getting prequalified by a lender are effective ways of reducing the stress. But how do they differ, and is one better than the other?
NARROWING YOUR SEARCH
Like applying for college, buying a home is all about narrowing your choices. While things like grades and test scores decide what schools you’d realistically get into, your options here depend on how much house you can afford.
Enter mortgage preapprovals and prequalifications. These are issued by lenders and say how much money you’ll be able to borrow based on your financial information. Knowing this figure is key to your housing search. If, for example, you’re preapproved for a $200,000 loan, you know that a $500,000 home just isn’t in the cards, while one priced at $180,000 is well within reach.
A PREAPPROVAL CARRIES WEIGHT
Mortgage preapproval is a much more thorough process than getting prequalified. Before preapproving you for a loan, lenders typically check your credit and will probably ask to see your most recent tax returns, pay stubs and bank account statements. Once lenders review this basic information, they’ll provide you with a document saying how much money they’d be willing to lend you.
Brandishing a preapproval letter when looking at houses shows that you’re serious about pulling the trigger on a home. Having a lender on board makes you more attractive to sellers, and may give you added leverage when negotiating on price.
A PREQUALIFICATION IS JUST A START
In a prequalification, a lender simply gives a would-be homebuyer a rough estimate of how much money he or she might be able to borrow based on basic information such as a credit score. Although this gives buyers a better sense of how much home they can afford, the financial institution isn’t actually saying it would be willing to loan that money. Prequalification letters simply highlight how much a homebuyer could realistically borrow, and therefore aren’t valued as much by sellers.
In addition to securing a mortgage preapproval, it’s good idea to bolster your credit score in the months leading up to your big purchase. The higher your score, the better your chances of landing a lower interest rate on your mortgage. A seemingly small difference in the rate can save you thousands of dollars over the course of a 15- or 30-year loan. Start by eliminating as much debt as possible while paying credit cards and other bills on time and in full.
These steps, though simple, will bring you closer to securing the best possible deal on your mortgage.
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