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Prequalification vs. Pre-approval

Use both to help you buy your first home.

You'll hear the words "prequalification" and "pre-approval" quite often as you shop for your first home. They have different meanings, but you'll find them equally useful.

Prequalification

Prequalification should be the first thing you do when you start home shopping. It's an informal, fast, and convenient service that gives you an estimate of how much you might be able to afford for a home purchase, based on your income and expenses.

Prequalification is not a commitment by the lender to loan you money. And you're under no obligation to borrow from a financial institution that prequalifies you. Think of it as a "reality check" and a time-saver: With a prequalified loan amount, you can narrow your search to properties you're more certain you can afford.

Pre-approval

Pre-approval, on the other hand, is a key stage in the application process for residential home mortgages. It represents an actual, written commitment to loan you a certain amount of money, provided you meet certain conditions. The process of pre-approval takes longer than prequalification (from several days to 2-3 weeks). It also requires that you provide in-depth documentation of your current financial situation.

If prequalification says "I'm just looking," then pre-approval says, "I'm ready to buy." Possibly the biggest benefit of pre-approval is the bargaining power it can give you, especially in a soft real estate market. As a pre-approved buyer, you can close the deal faster-which may be an incentive for a seller to drop his or her asking price.

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