The difference between being prequalified and being preapproved for a loan

Can I prequalify for a loan through a lender?

Yes. Go to a lender (a bank, for example) and ask to be prequalified. A prequalified acceptance by a lender is a good indicator, but not a guarantee, that you will be accepted for a certain loan amount. Always make your offer to purchase contingent upon getting your loan. If you do not, you become a cash buyer. There is a difference between prequalifying and being preapproved.

You can lose your deposit if you cannot complete the purchase and do not protect yourself with the contingency that you get your loan.

What is the difference between being prequalified for a loan and being preapproved for a loan?

When you prequalify, the lender simply takes your word for the information you supply. When you are preapproved, the lender has verified this information. Keep in mind, though, that even preapproval is not a guarantee of final loan acceptance, because interest rates may change. Higher interest rates mean higher payments, and that could mean you no longer qualify for the same loan amount. Only when the lender commits to an interest rate (locks in the rate) can you be sure that you qualify for the loan.

Once I am prequalified or preapproved for a loan, is my prequalification or preapproval amount the price of the property that I should really be shopping for?

Once you have determined how much you can most likely borrow, a good strategy is to cut that amount by 10%. If you calculate that you can qualify for a monthly payment of US Dollars 1,000, use US Dollars 900 as your goal. This will serve two purposes. First, it will give you a little cushion if interest rates turn out to be a little higher than you anticipated. Second, you will not stretch yourself so thin that even a small, unexpected expense will cause financial difficulty.

Amortized loans

Tell your real estate agent that you do not want to pay more than US Dollars 900 per month for a fixed rate, fully amortized loan. This will be the highest payment type of loan. If you like a home that you see for that payment, you are making a sensible purchase. If you absolutely hate the homes in that payment range, you can raise your sights a little. You may still keep the US Dollars 900 a month payment (at least for a while) by getting an adjustable or hybrid loan.

Once you know how much you can prequalify for, do not start shopping for a home before you understand some of the additional components common to the mortgages, the different types of loans available, and their variations. You can then calculate qualifying for the type of loan that is best for your situation.

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