Prequalifying and preapproval are important in the mortgage industry

What is prequalifying for a mortgage?

Prequalifying is an informal way to determine how much you might be able to borrow from a lender. You can be pre-qualified over the phone or on the Internet without filing any verification of your income or your debts. The lender has no obligation to follow up on a mortgage merely because you were prequalified.

What is preapproval for a mortgage?

Preapproval is a formal application and a lender’s guarantee to loan you a certain amount of money. It is based on you providing the same financial records as you would if you had already selected a home to purchase. The preapproval shows you and the sellers the amount that a lending institution has promised to lend you. Remember that a mortgage is not only based on your approval; it is also based on the appraised value of the real estate that will secure the mortgage. While you may be preapproved for a certain amount, in order to actually get the mortgage, the home also must be approved.

What is included in a mortgage payment?

The mortgage payment is made up of:

payments to the interest on the loan (the cost of getting the loan);
payments to the principal of the loan (the cost of the home);
local real estate taxes prorated over twelve months;
homeowners’ insurance premium prorated over twelve months; and,
optional mortgage insurance.

What is equity in a home?

Equity is the amount of the home that the buyer has actually paid for. It is made up of the down payment plus the amount of principal that has been paid. A mortgage payment is made up of interest, which is the amount you are paying the lender to give you the loan, and principal, which is payment toward the cost of the house. The more equity you have in a home the more you actually own. At each mortgage payment you are paying a portion toward interest and equity so the amount of equity increases with each payment.

Equity is important if a homeowner needs to refinance and when the property is sold. The larger the portion of the property the borrower owns, the less he or she will need to pay for when refinancing. In a sale, the equity is the profit that the homeowner gets.

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