Preapproval vs prequalification?

jenswrensOctober 5, 2009

Trying to really figure out what price range I can afford (I have a general idea, but want to make sure I can actually get a loan before I start seriously looking). Some places offer "preapproval" and others offer "prequalification." Some offer both. So, what's the difference? Is it that preapproval gets you a letter, prequal just gives you an idea of what you can afford? Which do I want? Do both involve a hit to my credit (via a credit check)?

And if I call more than one place, say Wells Fargo and coldwell banker mortgage co, does that give me 2 separate hits to my credit? Or just one?

Suggestions, please, before I make the phone call. TIA.

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Before you do ANY mortgage shopping, decide what's the maximum monthly payment you can afford, then remember to factor in a little extra each month for the stuff that comes up with home ownership. Then, when you go mortgage shopping, tell the loan officer what your maximum monthly payment is and go from there. When we went loan shopping, we could have gotten a loan 2x bigger than what we were willing to have based on our debt to income ratio...of course, this was in 2005.

    Bookmark   October 5, 2009 at 2:30PM
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With a prequalification, you basically just tell the lender how much you make and they "prequalify" you for an amount based on what you tell them. It is very generic estimate and will give you a ballpark of what you might be able to borrow.

For a preapproval, you would submit some paperwork and they will run slightly more detailed calculations based on your particular circumstances (credit history, debts, income etc).

As for your credit score, these "soft hits" for a preapproval have about zero impact. You aren't actually applying for a loan. They are just checking your credit score.

Overall, it is a very good idea not to borrow the maximum that someone will lend you. They have professionals working to determine the maximum amount you can afford to pay each month. However, that maximum doesn't take into account the fact that you like to go to the movies occasionally, or pay for kids dance lessons, or need a new car in a year or two.... etc. If you spend every cent you can on a home, you won't have anything extra for unexpected expenses.

    Bookmark   October 5, 2009 at 3:01PM
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Hi Jens,

To clarify, ALL mortgage inquiries are "hard" inquiries.... HOWEVER, all mortgage credit inquiries within a rolling 45 day window are treated for scoring purposes as a single inquiriy. The algorithm was adjusted to condone folks "shopping" despite making little rate difference.

My advice is for you to focus on finding a suitable financial planner with a lending license and practice. What your best financing structure actually will be has more to do with all the rest of your picture than the generic retail mortgage salespeople are ever trained to understand.

Once you've found a trustworthy & competent planner, have them process a full Pre-Approval for you. They'll generally do this at no up-front charge (other than possibly the cost of the credit reports.)

Dave Donhoff
Leverage Planner

    Bookmark   October 5, 2009 at 4:03PM
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