Prequalified or Preapproved Borrowers have an edge

Whether you are buying a home or are refinancing your current mortgage, you eventually have to apply for a loan and compare offers. You will need to gather a lot of paperwork, satisfy a list of credit requirements, negotiate the best possible loan terms and make sense of the loan estimate.

You will be asked to supply a lot of paperwork when you apply. Then you'll get some paperwork in return. Of the documents you receive, the most important is the loan estimate of closing costs.

If you plan to buy a home the first step is to determine how much house you can afford and then to start shopping for a mortgage. Your goal is to get prequalified or preapproved. Once you have done that you can start shopping for a home.

By getting prequalified or preapproved for a mortgage, you will have negotiating leverage because the seller knows that you already have a loan virtually in your pocket and you won't be tempted to buy an unaffordable house.

Prequalification

Prequalification acts as a dry run of the loan application process. The mortgage lender will use details you provide about your credit, income, assets and debts to arrive at an estimate of how much mortgage you can afford. The whole process may take only minutes, or a few hours at most, and is usually free.

While a "prequal" is nonbinding to the lender (because the information you provide has not been verified), it does serve as a good indication to potential sellers of your general creditworthiness.

Preapproval

Preapproval takes prequalification one step further. The lender will verify your income, assets, debts and credit history, and then issue you a letter stating that your mortgage is approved for a certain amount within a certain time. You may be charged a small fee to cover the cost of your credit reports.

Gain the Buying Edge

The advantages of prequalification and preapproval are twofold: You're more attractive to sellers, who needn't worry that they'll accept your offer only to have your loan turned down, and you'll save time closing when you find a home because the lender will have already completed the necessary qualifying and underwriting steps.

Important note: Should your financial circumstances change before closing, make sure to contact your lender, as your prequalification or preapproval may no longer be valid.