PREQUALIFIED- This is just a simple conversation with a loan officer. Questions are asked about your financial situation to determine if you can qualify for a loan. You will be asked about your job and how much income are you bringing in monthly. You will also be questioned on the amount of monthly debt you are paying each month. These help determine if you pass a certain qualification ratio, a.k.a your Debt- to-Income. It is very important to not NOTHING IS VERIFIED. We take your word on these things and this usually the first conversation you have with your loan officer.
PREAPPROVED- EVERYTHING IS VERIFIED. At this point, it has been determined based on your word alone that you can qualify for a loan so now the obvious next step is to verify the information using different documentation. Your credit report will be pulled to see what your borrowing history looks like and get a better look at your monthly debt. Your income will have to be verified either by using a W-2 for conventional loans or by alternative documentation such as bank statements or investments statements. Submitting an application to a lender for a loan is basically the preapproval but once the application is submitted, the lender will then continue to scrutinize the documentation for any irregularity. Preapproval helps move things along much faster but nothing is ever guaranteed. The only thing is really guaranteed is the ability and willingness to repay a mortgage but the lender has final approval and can deny a loan for any reason they see fit. Please be aware that loans are approved first and verified later, so in some instance, you can have an approval but the lender then finds in your documentation they are not comfortable with and deny you a loan. A common example is an irregularly large deposit in your bank account which will usually cause the lender to require a letter of explanation stating why and where that money came from.