No matter how much research you’ve done to figure out how much mortgage you can afford, ultimately the decision isn’t up to you—it’s up to your lender.
That’s where prequalification comes in. It typically only requires you to fill out a quick application or have a short phone call with a mortgage lender, and can both jump-start your mortgage loan and give you a price range to start house shopping in. It’s important to understand, however, that prequalification is only a prescreening, and doesn’t mean you’ll ultimately be approved for a loan.
Here’s what you need to know about the prequalification process.
What Is Prequalification?
Prequalification is designed to help lenders assess whether you’re a good potential applicant for a mortgage loan, as well as how much you might qualify to borrow. Prequalification is typically free of charge, and doesn’t oblige you to move forward in the loan application process.
In order to get prequalified, you’ll need to provide some basic personal and financial information, such as:
- Your full name
- Contact details
- The ZIP code where you hope to buy a home
The lender will then do a quick check of your credit report, known as a “soft inquiry.” Soft inquiries don’t impact your credit score.
Based on this information, the lender will give you a ballpark figure of how much you can borrow and how qualified you are to take out a mortgage loan in your current financial scenario.
Keep in mind that being prequalified doesn’t mean you’ve been approved for a loan, nor is it a signed offer that they’ll lend you a certain amount.
Why Should You Get Prequalified?
While prequalification isn’t a guarantee of anything, if can be an important step in guiding your home search. Having an idea of what you can afford and what price range you should be shopping in can help your or your agent find appropriately priced homes for you to consider and tour.
If you’re not thrilled about the results of your prequalification, you can take a break from the home buying process, no strings attached, and try to improve your financial picture.
Prequalification vs. Preapproval
Prequalification is generally the initial step toward preapproval. The main difference is that prequalification is based on information you provide. A preapproval is a much more involved process in which the lender evaluates your credit score and history, and looks at other financial documents to assess your eligibility for a loan.
Preapproval typically produces a more accurate price range and, because of the credit check it entails, can impact your credit score. Preapprovals often require an up-front fee depending on your lender.
Preapproval letters are useful when submitting home buying offers. They will give sellers confidence in your bid, and show that you’re serious about the purchase.
Steps to Get Prequalified for a Home Loan
Prequalification processes vary by lender, so start first by narrowing down a few mortgage lenders or banks you might like to work with. Most lenders have short prequalification forms or applications on their websites that you can use, or you may be able to text, email, or call a loan officer to get prequalified. Make sure you have an idea of your monthly income, your debts, and other financial basics before getting in touch.
Once you’ve provided the information required, you’ll usually get a prequalification letter within a few hours or days. If you don’t, you should ask for one. It should include your estimated maximum loan amount, your name, and a few other details. You can then use this information to begin your preliminary home search.
Get Prequalified for a Mortgage
Step 1 Have your financial details ready.
Step 2 Research and contact two to three mortgage lenders.
Step 3 Complete their prequalification processes.
Step 4 Use your prequalification letters to guide your home search.
When you’re ready to move forward with your mortgage loan, reconnect with the lenders and request quotes for loan rates and terms. This will help you compare pricing, rates, and other terms, and ultimately choose the best option for your financial situation.