When you're under contract to buy a property, having your mortgage application denied (after waiting several weeks) may cause you to lose the property after having spent hundreds of dollars on loan fees and property inspections. Even worse, you may lose the home that you've probably spent countless hours searching for and a great deal of emotional energy to secure. Some house sellers won't be willing to wait or may need to sell quickly.
- Prequalification is an informal discussion between borrower and lender. The lender provides an opinion of the loan amount that you can borrow based solely on what you, the borrower, tell the lender. The lender doesn't verify anything and is not bound to make the loan when you're ready to buy.
- Preapproval is a much more rigorous process, which is why we prefer it if you have any reason to believe that you'll have difficulty qualifying for the loan you desire. Loan preapproval is based on documented and verified information regarding your likelihood of continued employment, your income, your liabilities, and the cash you have available to close on a home purchase.
Going through the preapproval process is a sign of your seriousness to house sellers -- it places a sort of a Good Borrowing Seal of Approval on you. A lender's preapproval letter is considerably stronger than a prequalification letter. In a multiple-offer situation where more than one prospective buyer bids on a home at the same time, buyers who have been preapproved for a loan have an advantage over buyers who haven't been proven creditworthy.
Lenders don't charge for prequalification. Given the extra work involved, some lenders do charge for preapproval. Other lenders, however, offer free preapprovals to gain borrower loyalty. Don't choose a lender just because the lender doesn't charge for preapproval. That lender may not have the best loan terms.