Prequalification and Preapproval for Home Loans: What’s the Difference?

Let’s say you’re trying to sell a house, and your agent or attorney tells you that a potential buyer is prequalified for a loan. Great news—it looks like if you contract you won’t have to worry about the loan contingency! Or is it great news?
Does your buyer need to be pre qualified or pre approved…and what’s the difference between the two?
Prequalification
Prequalification for a loan is good, but it isn’t as good as pre approval.
Prequalification is a preliminary process, where a buyer finds out how much they could likely qualify for based on their income or assets. But prequalification is a preliminary process, and is not a guarantee of a loan, or a promise to loan, and as such, it should not be relied upon entirely by either the buyer or the seller.
Although the borrower does have to provide some documentation of income, he or she doesn’t provide the level or extent of documents that will be provided for the actual pre-approval.
Remember as well, that part of getting a home loan isn’t just about qualifying for the loan- -it’s about the property being purchased. And because prequalification happens early, often before there is any contract or any actual contract involved, there isn’t any way to know if a potential buyer’s bank or lender will lend in connection with your particular home or property.
Pre Approval
Pre approval is the next step, where the bank finally looks at an applicant’s credit history and other financial documents, and says yes, it would lend money to that particular borrower. Unlike prequalification where the applicant submits his or her financial documents, in the pre application process, the bank does its own investigation of the applicant’s finances.
Pre Approvals Can Expire
But even then you’re not finished, because pre approval often comes before there is a contract or a property or any closing scheduled. Think of pre-approval as a lender telling a borrower “we’ll lend you this money if we like the property, let us know what you find when you find it.”
Preapprovals are usually good for 90 days, giving the buyer or borrower plenty of time to find a property and close on it. But hitches and hiccups can happen at closings (for example, an inspection shows a problem with the property that needs to be fixed before closing, or a title problem needs to be cleared up).
Because of these things, a borrower may run up to the 90 day deadline. Parties may find that they had so many unanticipated delays, that by the time everything is ironed out, the borrower no longer qualifies for the loan.
The borrower can usually reapply, but that again adds even more time onto a closing, and because of a loan contingency in most real estate contracts, both parties may be able to get out of the contract.
Get an attorney to help you with your real estate closing. It’s too important not to. Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today for help with your real estate case.
Source:
investopedia.com/articles/basics/07/prequalified-approved.asp