Prequalified vs. Preapproved vs. Fully Underwritten
As a home buyer, odds are you’ll be getting a mortgage for your purchase. Lining up financing is the most important step before beginning your house hunt in earnest. Without it, you won’t know how much buying power you actually have, and will not be able to make an offer in a timely fashion.
The mortgage process can be confusing and intimidating, starting with the language. You may have heard certain terms bandied about, specifically prequalification, preapproval, and full underwriting. Each of these means different things in the lending approval process, and impact your position as a prospective buyer. So what’s the difference?
What Is Prequalification?
Prequalification is the most basic level of validation. Basically, it means the lender has taken a cursory look at your financial position and has given a high-level estimate as to how much they may be willing to lend you. A lender may even proactively send prequalifications to people as a tactic to get them to apply for an actual loan.
However, because prequalification is done without any exposure to your financial information or even a credit check, it cannot be used when making an offer on a home. For that, you need to go through a proper approval. It is, however, a good first step to give you a snapshot of how much you may be eligible to borrow, so you can begin to frame your home search while taking the next steps to line up your financing. “May” is the operative word here. The actual amount will be determined during the approval process.
What Is Preapproval?
Preapproval happens once you’ve submitted a formal loan application, and the lender looks at various factors, typically:
Your household income
Your savings
Your existing debt (e.g., credit cards or student loans)
Your personal credit score
You’ll need to submit tax returns, pay stubs, bank statements, and possibly other documentation. The lender also pulls a hard credit inquiry. Based on this information, the lender makes an evaluation and issues a preapproval letter with an amount they are willing to commit to. This typically only takes a few days. Once you have a preapproval, you can actually make an offer on a home up to the amount of your down payment and loan combined.
Preapprovals typically have terms of 30 to 90 days, meaning after that period you’ll need to reapply. Moreover, any significant changes to your financial picture may affect the preapproval, such as major changes to income or debt, job changes, changes to investments, or rapid depletion of savings.
Another thing to consider is that the hard credit inquiry will have a small negative impact to your credit score. For that reason, it’s best not to do too many applications simultaneously, and to wait on preapproval until you’re sincerely ready to commit to buying a home.
Once you’ve gone into contract on a home, the lender begins the process of underwriting your loan for full approval. When your loan is fully approved, the lender is prepared to fund at the time of closing.
What Is Full Underwriting?
Some lenders go an extra mile and fully underwrite their clients before they even go into contract. This makes for a faster, more seamless escrow process and a faster close; our friends at CrossCountry Mortgage’s FastTrack Credit Approval program allows for closing in as little as 21 days. Because the underwriters will have proactively approved your loan, you can make a strong, clean offer without financing contingencies. This makes your offer as competitive and compelling as an all-cash offer, since there is minimal risk of the offer falling out of contract for financial reasons. We recommend our clients get fully underwritten if possible, especially in very competitive markets.
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