When you are prequalified for a loan that usually means only your credit score was pulled by the lender. When you are preapproved that means your lender collected all income and asset documentation. There are some additional legal distinctions, but when you are serious about buying a home, it is imperative to get preapproved. Simply being prequalified isn’t enough.
If you start the home buying process on a prequalification you risk being denied on your loan later in the process because your lender did not conduct a comprehensive assessment of your situation. While both prequalification and preapproval identify an amount that a mortgage lender is willing to lend you, the preapproval is a more trusted by realtors and home sellers.
The preapproval letter is the first step in the home buying process, and it helps position you as a serious buyer who is ready to take the next steps to buy a home. Some real estate agents will require this before any home visits are scheduled.
WATCH: New Challenges with Mortgage Preapprovals
Factors that Influence Your Preapproval
- The size of your down payment. The larger your down payment the lower the size of your loan. In some case the down payment can impact the interest rate of your loan as well. However, there are low-down payment options as well.
- Your credit history and credit score. Beyond the preapproval, lenders can offer more attractive rates to home buyers that have a strong credit history and credit score.
- Your work history and income. Being able to demonstrate a steady stream of income over a long period of time gives you the best chance of being preapproved for a home loan.
- Your debt-to-income ratio. Mortgage lenders will compare your total monthly debt to your monthly income to make sure you are able to afford a monthly mortgage payment.
- The type of loan you are interested in. Each loan option comes with unique rules and qualifications and your lender can advise you on the option that is best for you.
More About Your Credit Score
Your credit score is an important part of the preapproval process. And don’t worry, having your credit pulled will not hurt your credit score. This only becomes a problem if you are seeking multiple loans at once, like a car loan, personal loan and a mortgage. There are multiple sites out there to check your credit for free. Two that we like are www.freecreditreport.com and www.creditkarma.com.
If you have a credit score below 640 you may want to dive deeper into your report to see if there are opportunities to increase that score. Ways to that would be by dispute errors if there are any with the credit bureaus, make sure you are current with all monthly payments, and reduce debt where possible.