Prior to mortgaging a property, there are some steps you’ll need to take to ensure that you’re taken seriously by the necessary parties. For the sake of sellers and estate agents, and their confidence in you, you’ll need to receive both prequalification and preapproval from your lender, and no, they’re not the same thing.
This is essentially earned in a face-to-face meeting or correspondence with the lender, where you give them some of your financial information in your own words. Once you’ve delivered some information to them, they’ll come back to you with a prequalification letter.
What is a prequalification letter i hear you asking to your screen? It’s just an official note from the lender giving a rough estimate of the kind of home that you’ll be able to afford, and you can show it to agents and sellers to show that you’re ready to get the ball rolling. However, they don’t hold nearly as much weight as preapprovals.
Earning your preapproval is based more on cold hard facts than a prequalification. Lenders require a careful look over your credit report, along with various other financial documents, such as bank statements, tax returns, and more, before they dish out a legitimate approval.
Once everything has been checked out and seems in order you can get a verified approval letter in the post, which is much like a prequalification letter, but with more legs. Sellers and estate agents will take these much more seriously than the prequalification letter you may have gotten prior.
Prequalification is given in good faith with no official verifications made
Preapproval is given with backup from verification by official documentation
Some lenders may use the terminology of prequalification and preapproval interchangeably, so it’s important that you check with new lenders you’re enquiring with what it is that they require for either.
While a prequalification is a good start, a preapproval will truly get things off to the races when it comes to searching for your home. Once your lender has written up your verified preapproval letter, they’ll have a much better idea of what kind of loan you can afford to take out, along with being able to accurately calculate an interest rate for you.
With this information, your estate agent will be able to line you up with viewings for homes that are realistic for your price range.
The seller will also be able to take your offers seriously, knowing that you have the capital to back up your offers. Some might still let you make offers without the letters, but you’ll have a better chance of things running smoothly with them.