Prequalification or Preapproval?
Prequalification is an informal discussion between the 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 sellers. 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 usally 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.
The following list outlines the type of information required for a lender to complete a loan prequalification / preapproval review.
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Property information
- Address
- Current value
- Employment and income data
- W-2 tax forms
- 1040 tax forms if self-employed
- Supplemental income (rental income, etc.)
- Assets
- Bank account statements
- Investment account statements
- Retirement account statements
- Supplemental income (rental income, etc.)
- Latest mortgage statement
- Monthly debts (car loans, credit cards, etc.)
Proof of Monthly Income
Banking Information
Liabilities
Answer some standard questions.
Agree to a credit check.