As the housing market continues to improve and actionable consumers retain negotiable positioning, preapproval is also becoming more and more important, more so even than prequalification, which is not the same thing.
Most people are used to the idea of being “prequalified” for a home loan or “preapproved” for a credit card; or, rather, they think they do.
The truth is, though, that these things are not the same and, though related, not exactly what many consumers hold them to be.
With the housing market improving, homes are receiving more and more offers, a fact which also implies that it will soon be a seller’s market again. When sellers have the power it puts buyers in an actionable position that requires a little strategy. In this market, it requires preapproval.
Many people might think that “preapproval” is just another way to look at “prequalifying,” but they are, in fact, exceedingly different.
The prequalification process, for example, is quite simple. Prequalification is based only on what information you provide to the loan officer or your broker regarding your income, credit score, assets, and liabilities when you are applying for a loan. Preapproval, however, requires documentation.
Kevin Chittenden, a vice president and regional sales manager for Wells Fargo Home Mortgage in Paramus, NJ, puts it like this:
[Prequalification is] verbal—it doesn’t really mean anything
because it is only an account of some basic information; it’s almost like hearsay, and, at best, it might help the loan officer or agent determine how much of a down payment you can afford.
Alternately, though, preapproval is “a real commitment, a commitment to lend.” Chittendon says that the initial review documented by an underwriter is what constitutes an intention for lending and begins the relationship with the consumer and the bank.
Wells Fargo is one of the largest mortgage lenders in the United States, so they know what they are talking about when it comes to the lending process.
Chittendon, and other professionals in the lending industry, will tell you that lenders will pull up all kinds of information before determining your actual qualifications. Of course, this includes your credit score and credit report but you should also make sure that you have all of the information requested in a mortgage underwriting.
This will include your W-2 wage statement or 1099s (because they are the best way to show your dividends and interest income), a recent pay stub (to show your average and annual earnings), a bank statement (to show your spending habits or overall net worth), and even statements from Individual Retirement Accounts (IRAs) and 401(k)s to show your investment assets. You may also opt to bring information regarding other assets that can be liquidated.
While this is the philosophy of Wells Fargo, other lenders may look at the preapproval much like they do a prequalification: as an opinion and not a guarantee or promise. Jack Guttentag of the Mortgage Professor website says that before getting a firm commitment from any lender a buyer should also choose a particular property and have it properly apprised.
Still, Ray Mignone, a certified financial planner from Queens, NY says
Preapproval carries more weight when you go to negotiate a deal. It gives [consumers] bargaining power.
Indeed, while prequalification and preapproval may not necessarily provide assurances for a contract, they are definitely good guidelines for consumers to use when entering into negotiations for a home loan.
Whether or not they help influence the actual formation of the terms and conditions is not necessarily important; what is important is for consumer to have the right information and the right strategy in order to get the best possible rate.