With the demand far outweighing the supply for houses all over the country, many first time home buyers are getting told that being preapproved could be their best weapon to winning in a bidding war. But, is this something that is 100% necessary? Now that the market is slowing down, it is important to remind home buyers that they have another option, prequalification.
Having a prequalification letter from a lender means you’re approved to buy a home up to a certain price point, based on information about your income, debt, and how much money you will put down. Preapproval, on the other hand, requires details about your employment, financial information, and credit history so the lender can learn more about you as a borrower. Preapproval means that a lender is stating confidence in lending you money to purchase a home, and is therefore more committal than prequalification. This is what makes a preapproval letter more powerful when it comes time to place an offer, because the seller has proof in your competence as a borrower.
Prequalification, however, can give you more freedom to shop because it gives you a realistic budget to shop for a home that you can afford. If you haven’t decided on a lender that you want to work with yet, the prequalification process can be a great way to gauge what different lenders can do for you. This is better than going through preapproval processes with different lenders, because all those inquiries into your credit score can damage it.
The general rule of thumb from experts in the field is: get prequalified to shop, get preapproved to negotiate.