Prequalify, Preapprove – What’s the Difference?

Some mortgage terms can be confusing, none more so than the similarities and differences between prequalification and preapproval. The two terms are often used interchangeably, but they mean very different things to lenders, real estate professionals and home sellers.

Prequalifying is a rough-idea process that tells you how much money you’ll likely be able to borrow to buy a home. You can prequalify yourself on any banking or real estate-related website simply by putting your salary, type of loan you want, down payment amount and a ballpark home price into a mortgage calculator. You can talk with a lender, who will also give you a ballpark amount without a credit check.

When you apply for a mortgage loan, you’ll share your income records, the source and amount of your down payment, and your social security number so the lender can pull your credit. This is the key difference between prequalification and preapproval – when the lender is able to review your application and verify your credit standing to make a lending decision.

The lender will get back to you within three days or less with a preapproval letter stating the maximum amount of money you’re approved to borrow.

Preapproval gives you the real numbers so you know exactly how much you can spend on a home. It lends you credibility with real estate professionals and with sellers who will take you seriously as a buyer.

Prequalification becomes preapproval once you have a purchase contract on a home. Then, the preapproval is real.


Build Wealth with a Less Expensive Home

Here’s a case for buying a less expensive home than you secretly want.

According to the U.S. Bureau of Labor Statistics, the average American spends approximately 37% of his or her income on housing. Notably, the top 20 percentile earners spend only 29.9% of their income, while the bottom 20% pay 39.9%. So what do high earners know that you don’t know?

If you have a little less money invested in housing, you’ll have more money to do other things, like: 

  • Invest more in your 401K or Roth IRAs.
  • Pay extra on your mortgage so one day you’ll be mortgage-free.
  • Save money to buy another property. Rent out the first home for passive income as renters make your mortgage payment for you.
  • Build or add to an emergency fund.
  • Make improvements without adding more debt or tapping into equity.
  • Reduce debt.

Conventional loan guidelines from Hud.gov suggest that the average homebuyer spend no more than 29% of his or her monthly gross income on housing. If your gross monthly income is $4,167, spend no more than $1,208, which should include property taxes and home insurance.

What if you have current debts? The Consumer Financial Protection Bureau recommends that your debt-to-income (DTI) ratio be no larger than 43% to secure a qualified mortgage – one the lender has done the due diligence on your ability to repay the loan according to government standards. However, many lenders aren’t comfortable with more than 36% DTI and may charge you higher interest rates accordingly.


FOUR THINGS TO DO BEFORE YOU MOVE IN

You’re almost done! All that’s left to do is to pack up and move in to your first real home. Here are a few tips that will make your first day as a new homeowner easier.

  1. Sort your belongings. Moving can be more expensive when you cart along items you don’t really want or need. A great way to do it is to sort and pack at the same time. Think in terms of three piles – keep, donate, trash. Trash the trash and drop the donations off at the first opportunity. Put your “keep” pile into moving boxes labeled by room.
  2. Plan your storage options. Closets, attics and cabinets can fill up quickly, especially if you’re downsizing. Where will the out-of-season sports gear go? What about holiday decorations? What goes in the garage?
  3. Plan your trip. Pack your car with necessities, including first aid, drinks, and snacks. Let each family member choose their favorite items to bring, like blankets, pillows, games, books, and a change of clothes, just in case.
  4. Meet your neighbors. If possible, introduce yourselves to your neighbors before you move. You’ll have a greater sense of belonging on moving day.

Five Safe Strategies for Homebuying

With home prices rising, you may be wondering if now is the best time to buy a home. The answer is always yes but there are ways to buy wisely and safely.

Save for a down payment. The more money you can put down, the better borrowing terms you’ll get on your mortgage. Establish a firm budget. Limit credit card spending and pay down your debts. Put your next raise into savings.

Choose wisely. Your home should improve your lifestyle, but not cripple you with debt. It should serve your household’s needs for at least five to ten years, so consider location, neighborhood, commute times, size, number of bedrooms, amenities and condition.

Buy within your means. Your payment, including interest and taxes, should be no more than 28-30 percent of your gross income or 40-42 percent of your income including existing debt. As your income improves, you’ll be able to meet other life goals, such as growing your family, starting a business, or buying more property.

Buy for the long term. The longer you own your home, the more equity, or ownership, you have and the less you owe the bank. Think of equity like savings you’ll get back when you sell or rent the property some day.

Take care of your property. Keeping your home repaired and updated is the best thing you can do to protect your investment. A home in top condition always sells for more money than homes in less desirable condition.

It always a good idea to research our local communities to get an idea of where you want to live and the price point for the community, then consult with you Berkshire Hathaway HomeServices Select Realty sales professional to map out a game plan.


HIRING AN INTERIOR DESIGNER

Interior designers are degreed and licensed professionals who make your home more functional and beautiful. If your home could use more space, better traffic flow, or an additional room, an interior designer is your answer.  

They save you money. Interior designers can buy appliances, furnishings, and more from “to the trade” vendors. While they charge for their time and/or add a mark up to each item you agree to, you’ll pay about the same for unique wow-factor results as you would for big-box, off-the-shelf items. 

They save you time. The interior designer learns your lifestyle, personal preferences and space concerns. They know the latest products and design solutions, and do the research so you don’t have to.

They help you prevent mistakes. An interior design is like a symphony – every detail should compliment everything else in utility and beauty. Designers give you what you want, but they also expand your tastes.

They have resources. Many design solutions must be customized, so designers have their own go-to teams of contractors, upholsterers, artisans and craftspeople. 

Most designers offer a free consultation to help you decide if you’ll work well together. Contact the American Society of Interior Designers for more information.