Before you get into any agent’s car, the first thing you’ll be asked is if you’ve applied for a mortgage and been prequalified or preapproved. Those terms may sound similar, but it’s critical that you know the difference. A prequalification is typically no more than a conversation with a loan officer who asks about your job, how much you make, and what kind of car payments and so on you might have. If the new house payment is below a certain percentage of your gross income and your total debts (for home, car, student loans, etc.) are under yet another certain percentage of your gross monthly income, then voilà, you’re prequalified. It used to be that after such a conversation a loan company would issue a prequalification letter stating that, yes, you can afford the house payments. But that’s pretty much about it.

If all you want to determine is whether a lender thinks you can afford a particular debt load, then that’s probably all you need. But if you’re getting serious about all this and are ready to shop for houses, then a prequalification means little. You need to take the next step, which means getting preapproved.

Preapproval verifies all the information you provided. At this point, your credit report is run not merely to verify the amount of total debt but to check whether your credit is up to par for a particular loan request. Your lender will request credit scores along with your report. Mortgage programs today have minimum credit score requirements. In a preapproval, the income you verbally gave to the loan officer is now verified by a third party by reviewing your paycheck stubs or a recent W-2. Your down payment and closing cost funds are verified by reviewing bank or investment statements showing that your required funds are sitting in the bank somewhere just busting to get out.

This is your preapproval. It’s nothing more than a verified prequalification, but it’s also nothing less than what your real estate agent or home seller wants to see. In fact, in today’s real estate market, real estate agents now know not to even drive someone around to look at homes without a preapproval letter in their client’s possession.

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