Preapproved or Prequalified: What's the Difference?

Preapproved or Prequalified: What's the Difference?

Confusing prequalification with preapproval can mean disappointment for both a home seller and a buyer. Real estate experts say it's smart to urge buyers to become preapproved by their lender – not just prequalified.

For a buyer to obtain a bona fide preapproval, he must submit a loan application with the necessary documentation and fee. After the lender verifies and analyzes the application, it will notify the applicant of how much money he can afford to borrow. Armed with that information, the buyer can confidently go home shopping.

Prequalifications are simply an estimate of what a buyer can afford. A buyer who assumes that this estimate is accurate and chooses a home based on the information may, in fact, be denied a loan when he actually applies, a situation that wastes his time and can put a seller in an a bad position if they've already turned away a qualified buyer. And, of course it wastes the real estate practitioner's time as well.

Source: Kiplinger’s Personal Finance Magazine (08/01/2007)