Many potential borrowers mistakenly believe a mortgage "prequalification" or "preapproval" letter is the equivalent of money in the bank. But that's not the case.
Remember, prequalification is not the same as preapproval. Prequalification is an estimate of how much you can afford and the figure is not guaranteed. Prequalification is a good step to take in the home buying process because it can narrow down the homes you look at, but ultimately, it does not take into consideration you entire financial picture. Preapproval is a more thorough and official look at your finances, so don't assume that because you prequalify for a certain amount, you will be preapproved for the same figure.
Prequalification and preapproval are an important piece of the home buying puzzle, but they are only a preliminary indication that you might be able to obtain the loan you want if other conditions are met. Your financing is only final once you have received a final approval letter.
Getting preapproved for a mortgage requires that you complete a mortgage application and supply a lender with all the necessary documentation to check your financial background and credit rating. You will then be told the exact mortgage amount for which you are approved.
Your lender can give you a preapproval letter, which will make it easier to shop for a home. With preapproval, you won't have a loan contingency as part of your offer, meaning it's likely more attractive to the seller, even if it's not the highest price. Preapproval also expedites the home buying process, as much of your loan paperwork is already taken care.
Ultimately preapproval is important because when you know how much of a mortgage you qualify for, it is easy to make a monthly budget. You can estimate the typical amount that you pay for bills each month, and remember that utilities for a home can be more expensive than for an apartment. Also, you can factor in money that you spend on entertainment or other expenses. When you add what your monthly mortgage payment would be to that total. You can know if this is a number that makes you comfortable. Knowing your financial obligations each month can help you in knowing how much home you can afford.
Lenders may allow you to borrow more than you are comfortable with; remember just because you're approved for a certain amount doesn't mean you have to borrow the full amount. So if you feel stretched, don't be afraid to buy a less expensive home.
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