What is the difference between being prequalified and preapproved for a loan?
Because they sound similar, people often think that being pre-qualified for a home loan is the same thing as being pre-approved for one. However, being pre-qualified for a home loan is quite different than being pre-approved for one, and it is important to know the difference and not confuse the two. Basically, pre-qualifying is the first step in the mortgage process; pre-approval is the second to last step, right before full approval.
When a potential home buyer is pre-qualified for a home loan, it means that a lender has given the potential buyer an opinion as to the range of home prices that should fit his budget. Pre-qualification is usually based on a quick credit check and conversation with the buyer. Pre-qualification provides a realistic idea as to what type of home the potential buyer should be looking at, and, even if the buyer isn't ready to commit to purchasing a home, helps the buyer make important financial planning decisions for when he is ready to commit to the home-purchasing process. Often, real estate agents have potential buyers seek pre-qualification before taking them out to look at homes.
Pre-approval, on the other hand, means that the potential buyer has submitted almost all the documents necessary to be granted a home loan. The lender has checked the potential buyer's credit and other financial information, and is reasonably certain that it will extend a loan to the buyer. At this stage, the buyer knows the maximum amount the lender will give her, and she is in a stronger bargaining position with the seller because she is a viable buyer who will be able to close more quickly than a buyer whose loan has not already been approved.
Beyond pre-approval, a potential buyer can be fully approved. This means that the lender has already committed to extending a loan to the potential buyer; it is almost the same as having cash in hand. Full approval is often subject to receiving a clear title report and appraisal. The title report and appraisal help to help determine the final loan amount - a lender won't loan more than the appraised value of the home, no matter what amount the buyer has been approved for. This is the strongest position for a potential buyer to be in because the seller knows that the buyer will be able to complete the transaction quickly.
There is a huge difference between being prequalified and preapproved for a loan.
Prequalified means that a lender has reviewed the information you have provided about your income and your debts, and based on THAT information has decided that you could qualify for a loan in the amount of $XX,000.
However, whether the loan would actually be made will depend on which house you hope to buy, its appraised value, and you resubmitting all of your documentation to the bank so that it can determine your ability to repay a loan AT THAT TIME.
Basically, a prequalification is no commitment at all, but only a tentative acknowledgement from the lender that you might be eligible for a loan. A 'preapproval' is an actual commitment from a lender to make a loan in a specific amount.