One of the most complicated steps of buying a house is figuring out what kind of mortgage you can get. Getting "preapproved" or "prequalified" can help the process in several ways, including speeding up closing after you've made an offer on the house of your choice.
Getting preapproved or prequalified can also help you figure out how much you can afford to spend on a house. However, the process may also lead you to bite off more than you can chew. Here's a guide to the preapproval and pre-qualification process.
What does preapproved mean?
First, understand the difference between prequalified and preapproved. When you're prequalified, the loan officer does a first pass at whether or not you can afford a particular loan. You provide information about your work history, income, and credit history, and receive a nonbinding prequalification evaluation from the lender.
Unlike the preapproval process, the prequalification process may not involve a credit check. Also unlike the preapproval process, it may not take into account other forms of outstanding debt, so you may be surprised at how large a mortgage you prequalify for. (This is why you don't want to let the prequalification change your perception of how much house you can afford.) If you want to see a sample prequalification letter, try Wachovia's free prequalification site.
Preapproved is a greater commitment: the lender will check your credit report before issuing you a preapproval for a loan at a certain interest rate, valid for a certain amount of time. Bankrate.com has a list of potential questions to expect from the loan officer and a suggested list of documents to have on hand.
How this affects your credit
This is the point at which you'll want to look at different potential loans in a very short time period. The reason is that multiple inquiries as to your credit can hurt your credit score (because the credit agencies tend to assume you're either piling up a lot of credit or getting rejected, so a bad risk in either case).
But multiple inquiries within a 14-day period count as one inquiry, precisely so that people can shop around for loans. By the way, you don't necessarily have to get preapproved by the same lender who prequalified you.
Benefits of preapproval
Lenders and real estate agents generally advocate getting preapproved even before you make an offer on a house. A preapproval letter shows the seller that your credit has been checked out and you're serious about house-buying.
If you're getting preapproved before you find a house you want to buy, you'll probably want to lock in the interest rate offered for a certain period of time (often 30 or 60 days). After 90 or 120 days, you may need to renew the preapproval; if interest rates have changed significantly over that period of time, you may not be able to get your earlier rate. That's why you want to get prequalified first, and then preapproved once you're in the thick of house hunting.
Protect your rate
One last note: try to avoid doing anything that could sharply impact your credit rating once you've received your preapproval. A preapproval isn't a guarantee that you'll get the loan, and if you've taken on new debt in the meantime (such as for a car), you may find yourself preapproved but still having trouble getting the loan, or unable to get the loan on the terms you wanted. Once you're preapproved, though, you should be feeling more confident in your ability to buy a house.