A buyer that has been preapproved for a loan is preferable to a buyer who has only been prequalified. Here's why.
What it means to be prequalified for a loan:The prequalification process is fast, easy and usually free. Buyers don't send financial statements to the lender, nor do they grant the lender access to their credit score. Instead, they answer some basic questions about their financial situation over the phone or via a form on the internet. The lender evaluates this cursory information and provides the mortgage amount for which the borrower may qualify. Prequalification is only the first step in the loan process.
What it means to be preapproved for a loan:The preapproval process requires the buyer to complete a lengthy mortgage application and pay an application fee. The lender reviews the buyer’s credit score and performs a more in-depth analysis of the buyer’s financials to determine their ability to purchase a home.
The lender then provides a conditional commitment in writing for an exact loan amount for which the buyer will be approved. A preapproved buyer knows roughly the interest rate of the loan and the monthly mortgage payment to expect. This helps the buyer to figure out the home price he or she can afford.
Loan commitment:A buyer who is preapproved is one step closer to a loan than one who is only prequalified, but the loan is still not guaranteed until a lender fully approves both the borrower and the home to be purchased. This step is called the underwriter approval or loan commitment.
During the loan commitment phase, the lender reviews the home’s appraisal, title report and inspection reports. The lender also checks the buyer’s income and credit profile again to verify there have been no substantive changes, such as job loss, since the initial preapproval. The loan commitment process usually takes between 10 and 30 days from the time the lender receives the buyer’s completed loan application.
Focus on strong buyers:As a seller, you can decide whether you are willing to show your home to buyers who have only been prequalified or preapproved. You can also request that a buyer resubmits an offer only after they've been preapproved for the necessary loan amount.
Ensuring your buyer is preapproved for the right loan amount before accepting an offer increases the likelihood that the buyer can obtain the needed loan, and reduces the risk of the deal falling apart during the escrow process.