A prequalification, in essence, is simply a conversation that you have with a mortgage lender that helps to assess your buying power. You will provide verbal information about your income and finances, which the lender uses to determine how much you could likely borrow for a home. The lender provides this service as a courtesy, in the hopes of earning your business, but there is no commitment between the parties. You are not bound to work with a lender just because they provided a prequal letter.
A prequal letter is just that- a letter from a lender explaining that, based on the information you’ve given, you should be able to qualify for a mortgage of a certain amount. Most Realtors® and some sellers require a prequal letter before they will show a property, because it demonstrates a commitment to the process. For safety and security, I require a prequalification letter for any new buyer that asks to meet at a vacant property. In the case where it is required by the seller, I’m ethically bound to make sure I have that letter on file before I unlock the house.
A preapproval is the first step in obtaining a mortgage for a specific property. During your option period, your lender will check your credit reports, verify funds, confirm your employment, and take other steps to assess your creditworthiness. Assuming all goes well, your contract moves forward, and your loan application moves to underwriting for final approval. All of these variables will be scrutinized and checked again before closing, so it’s important to maintain consistent employment and and debt levels; this is not the time to change jobs or buy a new car! If something unforeseeable causes a change to you or your spouse’s employment, debt, or credit rating, it’s important to let your lender know immediately.