Whether buying a house, car, furniture or another big-ticket item, an individual has two main options: pay the entire amount out of pocket or obtain a loan. Obtaining a loan involves working with lenders. To avoid the disappointment of having your loan application denied, you can find out ahead of time how much you can afford to borrow. Prequalification and preapproval are different from each other, but both are ways to determine the amount of borrowing power an individual has.
Difference
Conducting a search for property before knowing the amount of money a lender may loan you to purchase the property can lead to disappointment. For instance, a buyer interested in purchasing a $100,000 house will be unable to complete the purchase if the lender concludes that he can only afford to buy a $30,000 house. Thus, the first step in securing a loan is to get prequalified, which gives the buyer a quick snapshot of his buying power. In the next step of the process, preapproval, the lender provides a specific loan amount a person can borrow.
Prequalification Process
The prequalification process occurs in two ways. A buyer can use an online calculator to input basic financial information or she can consult a lender directly. The buyer provides the lender with basic financial information such as assets, debt and income. Generally, a lender doesn't require a prequalification fee. Regardless of the way a buyer prequalifies, she receives an approximate or ballpark figure of what she can afford to borrow.
Preapproval Process
The preapproval process is a little more complicated. During the preapproval process, a person must complete an application, supply financial information and pay an application fee. A lender then reviews financial information provided such as federal tax returns, proof of income, bank statements, W-2 statements and a credit report. Based on the information, a lender provides an individual with a specific loan amount. For instance, when obtaining preapproval for a mortgage, a buyer receives a preapproval letter from a lender with the loan amount and terms and condition associated with the loan.
Considerations
If an individual intends to make a purchase, it's best to seek a lender's preapproval. Agents see preapproved buyers as more serious (and more valuable) because they've taken proactive steps to secure a loan, explains Smart Money. Preapproval doesn't commit a person or lender to a loan. Thus, a buyer can choose to borrow money from a different lender without out breaking any promise or commitment.
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