The initial steps of a real estate transaction help pave the way for a property seller to approve your offer and set you on the road to your new home or commercial property. Obtaining mortgage preapproval could make or break your efforts to buy a piece of real estate.
There is often confusion regarding how preapproval works. Clarification on this issue should help you understand where you stand in your real estate purchase.
Prequalification is not preapproval
Many homebuyers use the terms “preapproval” and “prequalification” interchangeably when talking about mortgages. However, these two processes are distinctly different.
Prequalification provides a rough estimate of the loan amount a lender may offer you based on limited information you provide. On the other hand, preapproval is a more thorough process where the lender verifies your income, assets, debts and credit history to determine a more accurate loan amount.
The benefits of preapproval
Attaining preapproval might be what convinces a seller to go with your offer. With a mortgage preapproval letter, you can show the seller that a lender has vetted you and that you likely qualify for a home loan. Additionally, going through the preapproval process allows you to confirm your price range and better focus your home search.
Preapproval is not final approval
While preapproval shows that you are serious about buying a property and that your finances are in strong shape to handle a mortgage, it does not guarantee that your lender is going to fund your mortgage. A final loan approval often depends on fulfillment of additional requirements.
For example, the appraised value of the home must meet the purchase price. Also, your financial situation should remain unchanged until closing. Major events like losing your job or taking on additional debts can cause your lender to deny your loan.
Preapproval provides buyers with a stronger position with a seller but does not remove all risks of loan denial. Being aware of these nuances can allow you to navigate your real estate purchase more effectively.