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If you’re ready to get serious about your home buying journey, one of the first steps is seeing various lenders. As you become more familiar with the process, you’ll likely hear the terms preapproval and prequalified mentioned again and again. We’ll look at how each letter works and what you should know before approaching a home seller. 

Prequalification Vs. Preapproval 

The key difference between a preapproval and prequalification is that the preapproval letter is much more involved. With a prequalification, the lender will look at the general state of the buyer’s assets before estimating how much home they’re likely to afford. Lenders are not diving into the buyer’s past, which can make real estate agents wary of accepting prequalification letters. 

Preapproval 

With a preapproval letter, you’re typically asked to provide the following:

  • Two year’s worth of W2s
  • A month’s worth of paystubs 
  • Two month’s worth of bank statements 
  • Social security card 
  • Considering the amount of paperwork you need to provide (and the lender needs to process), preapproval letters can take months to generate. On the other hand, a prequalification letter can be procured in little more than 24 hours. 

    Additional Facts 

    Here are a few facts that can help you know more about what to expect:

  • Preapproval letters can cost several hundred dollars to generate. We recommend starting with your financial institution because you already have a relationship with them, and they may not charge as much. 
  • You may be able to lock down interest rates at the time of your preapproval letter. This is exceptionally helpful for those who want to know what their payments will be down to the penny. 
  • Make sure to calculate closing costs beforehand so you know exactly how much you’ll owe out-of-pocket. 
  • Does It Help to Have Both?

    Not necessarily. Prequalification letters are generally recommended for homebuyers who may not know for sure if they’re ready to buy. It’s a general indication of how much money you’ll get, which can help you decide if it’s enough to get a preapproval letter. If you’re in a buyer’s market, you may be able to get away with a prequalification. However, it’s generally the far less coveted letter that you can have. 

    A preapproval letter is definitely the best letter you can take to a seller when you’re ready to make a bid on a home, but it’s important to note that even these letters may fall through. For example, if a major event occurs (e.g., a job loss, etc.) between when your financial institution issued the letter and when you close on the home. Talking to a real estate agent or financial expert can make it easier to navigate it all. 

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    When you want to buy a home, you know that good credit will be necessary. You may have heard some things about your credit score that just aren’t true. Read on to set the record straight on some of the most significant misconceptions about credit. 

    Checking Your Credit Only Gives You Knowledge

    Checking your credit score or report will not lower your score. The only way checking a score is damaging to a credit score is in the form of credit inquiries. This is when a lender, employer, or other merchant checks your credit in order for you to either gain employment or open a new line of credit. You have the right to review your score without it being impacted. 

    You Shouldn’t Carry Balances

    The best way to keep a high credit score is to use a credit card and pay the balance off in full each month. It’s a false belief that carrying a balance is an excellent way to increase your credit score. You need a low debt level to maintain a good credit score. 

    Your Age And Income Have Nothing To Do With Your Score

    It’s natural that older people who have a longer credit history have a better shot a good credit score, but your age has nothing to do with your score. It all depends on when you established credit. Some people started their credit histories early because their parents opened accounts for them. Others needed to wait awhile before opening their first credit card account. 

    Your income also is not a factor in determining your credit score. It may be true that if you have a higher income, it’s easier to stay out of debt, but the amount of money you make has no direct impact on your score. 

    You Cannot Access Your Credit Score For Free

    You have a legal right to obtain a free copy of your credit report once a year but, your credit score isn’t included in this report. There are free services that are outside of your credit report that will give you your credit rating, but you need to search for them. It’s a good idea to check your credit report periodically, but you should also know your score especially if you’re getting ready to make a big purchase such as buying a home.

    Your Credit Matters More Than You Think

    While you know your credit score matters when you head to get a home loan, you may not know just how many entities take your credit into account when you apply for them. Some things you may do where your credit score matters:

    Apply for a job

    Apply for a credit card

    Rent an apartment

    Sign up for phone and Internet services

    Get other utilities in your home

    Your credit history gives a picture to the world to let them know if you’re financially stressed. If you have gone through rough patches, there are always ways to bring your score up. If you had a judgment ruled against you in a lawsuit, for example, that would only appear on your credit report for a certain number of years. Lenders will often allow you to explain bumps in your credit report as well. Understanding credit is half the battle to a good score!      

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