Although we live in an ever-changing market where interest rates fluctuate faster than the tides, what has remained steadfast when buying a home, including those using VA loans, is the preapproval letter.
What’s the big deal about a preapproval letter? After all, didn’t you already receive that prequalification letter from your mortgage lender? Sure, but think of the preapproval letter for your VA home loan as Google Street View and the prequalification as a folding paper map. Both take you where you want to go, but while the map shows you how to get to the location, Google Street View offers the added bonus of showing you precisely what you’ll find once you get there. Let’s take a closer look at the differences between the two and the role each one plays as you navigate through the homebuying process.
In simple terms, a prequalification letter gives you, your real estate agent, mortgage lender, and anyone else you involve in your home search an estimate of how much you have to spend for a house.
As consumers who live in the age of instant gratification, we like the prequalification process because it’s quick and relatively painless. But as the first step in applying for a VA mortgage, prequalification could lull you into a false sense of security by the fact that it is so fast and easy.
So, what is the process to prequalifying for a home loan? First, lenders may ask you to fill out a form or answer a few questions over the phone to gather information about your homebuying goals, assets, debts, employment, and military service to get a sense of your financial story. At this point, none of the information you provide is verified by the lender; it’s all based on your word. Lenders don’t run a hard credit history check when you apply for a prequalification letter. Some lenders can get you an answer within a few minutes. Others may require a day or so. Note that the information you submit to a lender only goes toward providing an estimate of the amount you can borrow. The lender doesn’t take a magnifying glass to the borrower’s finances and, instead, bases the prequalification status strictly on the information provided. With this information, your lender will estimate a loan amount — not a specific number.
I’ve got my prequalification letter; do I really need a preapproval letter from my VA lender before I start shopping for a home? The literal answer is, of course, no. However, if you find your dream home and want to make an offer, that prequalification letter alone won’t get you past the free cookies at the open house. The hard truth is that most sellers won’t bother looking at an offer that isn’t accompanied by a preapproval letter. Let’s say that you and another potential buyer—both with similar financial profiles except that the other person has a preapproval letter in hand—fall in love with that perfect split-level with the retro kitchen. You’ve got to have it, and you’re each ready to make an offer on the spot. Sorry, but nine out of 10 times, that other looker will win out because of that preapproval letter, which tells the seller that the buyer is one step closer than you toward getting the financing needed. To the seller, you’re not a sure thing with only a prequalification letter. As the buyer, you also benefit from having a preapproval in situations where you’re up against multiple offers.
A prequalification letter doesn’t carry as much weight as a preapproval because the information it contains is based on stated income, expenses, and assets—meaning it’s not verified. Have you ever stretched the truth about your income on a credit card application? Maybe you fudged an expense account amount when preparing your income taxes. It’s a harsh reality, but people sometimes paint an inaccurate picture of their finances, giving misleading information regarding their credit scores or income. As a result, their prequalification letter states that they qualify for much more than they can afford. In these cases, deals fall through or are canceled once the bank does a thorough financial investigation, which the law requires. Do you really want to risk losing the house of your dreams during the escrow process because you didn’t bother securing a preapproval letter?
The preapproval process, not surprisingly, is more involved than the one for a prequalification letter. After all, you’re getting a lender to give you a conditional confirmation for a specified maximum amount of money. Unlike the prequalification process, this second step requires more concrete information that goes beyond your word. You’ll fill out a mortgage application and provide the necessary paperwork. Standard documents could include a copy of your driver’s license or other government ID, a statement of service for active-duty military, recent pay stubs, W-2 forms, or 1099 forms if you own your own business, and bank statements. In other words, the lender will require supporting documentation from you that verifies the information you provide. Since the lender will pull your credit history, you should check it beforehand so that you’re not surprised by any unexpected activity.
Note that some lenders charge for a preapproval letter, but at Aligned Mortgage, we do not.
Although going through the process for a preapproval letter takes extra time and effort, it’s worth it. Unlike a prequalification letter, a typical preapproval will:
The preapproval also lets you know how long it is good for, usually 60 to 90 days. The letter expresses to the buyer that you are approved and ready to buy. Think of that hard-won preapproval letter as a virtual “guarantee” that the lender will approve you for the loan, barring any changes in your financial situation. You now can shop with confidence.
It makes sense to wonder why you should bother with a prequalification letter when you’re going to turn around and get preapproved. There’s a good reason why you’ll need both. First, real estate agents and sellers want to see potential buyers who are already working with lenders. This first step shows them that you’re a serious buyer who has a relationship with a mortgage lender. Plus, if you’ve given accurate information to your lender, the prequalification letter will provide you with an approximation for how much house you can afford. There’s no need to look at homes that cost $350 thousand if your budget tops out at $250 thousand. As you can see, both the prequalification and the preapproval serve specific purposes to get you on your way toward the homeownership that every active-duty military and veteran deserves.
At Aligned Mortgage, we won’t waste your time. Our goal is to educate as many veterans and their families as possible on the VA home loan process so that they can own a share of the country they fought to defend. We provide preapproval letters as a standard part of our procedure. Why? Because we know the power that a preapproval carries. Aligned Mortgage has helped thousands of veterans purchase homes throughout the United States. Our team of VA loan experts is dedicated to providing you with an unparalleled VA loan experience. Aligned Mortgage team members are here to ensure that our valued military families have all the expert guidance they’ll need along the way.
Take the first step toward homeownership — get preapproved today.
VA home loans. They’re what we do.