To an outsider, it probably seems like the mortgage industry specializes in really confusing lingo. Take the term preapproval as an example. The goal of the preapproval is to give home buyers a realistic idea of how much they can afford when shopping for a home.
The problem is even the term preapproval can mean different things depending on the situation and how lenders approach it. It can be a lot to figure out when you’re looking to buy.
In this post, we’ll take a look at a comparison of two common types of mortgage approval for shopping: Prequalified Approval (a.k.a. prequalification) and preapproval, as well as their differences (if any). Then we’ll look at how the Power Buying ProcessTM from Rocket Mortgage® by Quicken Loans helps clarify this cloudy mess with three levels of approval.
What Does It Mean to Be Prequalified?
As with preapproval, which we’ll discuss later, having a Prequalified Approval may mean different things to different lenders or the terms may be used interchangeably. However, in this section, we’ve chosen to discuss the most common interpretation of what it means to be prequalified. This is also the standard at Quicken Loans.
In a Prequalified Approval, your credit is typically pulled so that the lender will get a look at your three-digit FICO® Score and report. This score is used to determine what loans you might qualify for. For example, the lowest median FICO score necessary between Equifax, Experian and TransUnion is 580 for an FHA loan and 620 for conventional loans.
By looking at your report, the other thing a lender gets a look at is your total revolving and installment debts. Revolving debts are things like your credit card bills. Meanwhile, installment debts include student, personal and car loans.
Lenders will also ask you for verbal verification of any income and assets you plan to use to qualify for the mortgage. By comparing your debts to your income, lenders get something called your debt-to-income ratio (DTI). This lets them determine the monthly payment you can afford, which in turn gives them the maximum price of the house.
Because your income and assets aren’t actually verified for a Prequalified Approval, real estate agents and sellers may not look at a prequalified buyer as seriously as someone who’s taken the next step.
What Does It Mean to Be Preapproved?
If you’re preapproved, it could mean the lender has taken the extra step of verifying your income and assets. This is done by gathering things like your W-2s, tax returns, pay stubs and bank statements. On the other hand, this could mean they pulled your credit and got a verbal estimate of your assets and income. The latter would be the same as a Prequalified Approval. This may naturally lead to the next question.
What’s the Difference?
The difference between a prequalification and a preapproval depends on how lenders use the terminology. Often, these terms are used synonymously, but in terms of the strength of the approval and the offers you’re making, it’s important to know exactly what you’re getting when you’re prequalified or preapproved.
At Quicken Loans, we have three levels of approval in our Power Buying Process, in order to more precisely specify the level of examination your mortgage approval has received.
In a Prequalified Approval, we pull your credit to get your score and a look at your debts. Verbal income and asset statements help us calculate your DTI and let you know how much you can spend, but the best way to think of this is as an estimate. Because your income and assets haven’t actually been verified, it’s not as strong as it could be.
Sellers and their real estate agents prefer offers from people with verified income and assets. There’s just less chance that the deal falls through at the last minute. For this reason, we encourage everyone to get a Verified Approval.
During the Verified Approval process, we pull your credit. We also have you share income and asset information with us. We promise to verify your approval amount within 24 hours of you getting the requested documentation back to us.
A Verified Approval Letter should give you the absolute confidence you need to back up the offer you’re making. In fact, if you don’t close based on our review of your documentation, we’ll give you $1,000.
No one wants to pay more for a mortgage than they have to. One way to protect against that concern is to lock your interest rate when you see one you like so it doesn’t go up. However, until now, you’ve had to wait until you had a purchase agreement in place to lock your rate.
Available on 30-year conventional, FHA and VA loans, RateShieldTM Approval|| is intended to alleviate the interest-rate concern.
With a RateShield Approval, you can lock your interest rate for up to 90 days while shopping for your new home. Should interest rates happen to go down by the time you find your new home, we’ll lower the rate to the current interest rate where you’ll remain locked, giving you time to close your loan. If rates have gone up, we honor the rate you initially locked. Either way, you win.
This gives you the ability to protect your monthly payment because your interest rate won’t go up. Your offer will also have the strength and confidence on par with that of a cash buyer because you’ll know you’re approved. This makes your offer very attractive to sellers in the competitive housing market we have today.
Ready to give our Power Buying Process a whirl? You can get started online with Rocket Mortgage by Quicken Loans. If you’d rather talk to one of our Home Loan Experts, you can get in touch with us at (800) 785-4788. If you still have questions, you can go ahead and leave them for us in the comments below.
§Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.
||RateShield Approval locks your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products. Your exact interest rate will depend on the date you lock your rate. Once you submit your signed purchase agreement, we’ll compare your rate to our published rates for that date and re-lock your interest rate at the lower of the two rates for an additional 40 to 60 days. Additional conditions or exclusions may apply.
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