When home buyers or mortgage loan hunters set out to initiate the borrowing procedures to accomplish this task, they invariably try to arm themselves with a bit of negotiating advantage by getting a pre-determined evaluation on their chances. Usually they have preconceived ideas regarding the term ‘prequalified’ and ‘preapproved’ when presenting their credentials to prospective sellers and real estate agents. In the home-buying and mortgage lending world, these terms are quite different.
This classification refers to the estimated amount of a mortgage a lender would offer after performing a preliminary investigation regarding a borrower’s current credit status, as well as the overall asset and liability figures presented for evaluation. This information is unverified at this stage, and yields only an estimate of the funding available until further inquiries can be performed. This preliminary status does not indicate a predetermined or ‘approved’ line of credit has been offered by the lender. Prequalification is a term used to describe what a potential lender might approve for the mortgage loan, and is only based on the validity of the unverified information provided by the borrower. It is a basis for the borrower to begin shopping for a home in the general framework of affordability.
This classification describes an evaluation that is further along in the loan acquisition process, though it doesn’t represent the lender’s complete and documented commitment toward a borrower’s final approval for the loan. Once a full credit evaluation is completed after acquiring the necessary reports from the credit bureaus will the lender finally commit to providing a mortgage estimate in writing. In recent years, there has been far more scrutiny directed toward complete verification of the stated asset and income figures a borrower provides before a ‘preapproval’ status will have much credibility. Therefore, until a complete application process has been initiated, a lender is not genuinely bound by the preapproval notification to actually honor any real terms in the preliminary agreement. Not until an application is officially filed will a prospective lender get serious about investigating a borrower’s true financial integrity.