Updated June 20, 2019 12:29 PM PT

What Does Prequalify for a Mortgage Mean?

Read more about Mortgage

When you're told you have prequalified for a mortgage, it can give you some confidence about buying a home - but not much else. Here's what it means.

Looking for a new home? Start by figuring out it what you can afford.

A prequalification from a lender will estimate just how big a loan you can get. Prequalification doesn't commit you to a loan OR a particular lender.

Keep reading to learn if you should get a prequalification and where to begin.

What's the Difference between Prequalification and Preapproval?

Prequalification is a basic measure of what you can afford.

Preapproval is a more concrete way to give sellers confidence in your ability to secure a loan. In other words, preapproval gets you much closer to actually signing a mortgage. (More on that later.)

A prequalification letter won't impress sellers if you are trying to buy a house. They or their real estate agents will know that the prequalification does not provide any concrete answers to what you could afford.

What You Need to Know

Prequalification is not a promise to lend you money. Lenders base their prequalification decision on basic information that you provide.

They don't require proof or pull your credit yet. Rather, they look at your:

  • Income
  • Estimated monthly payments
  • Total assets

Key Fact: Your credit score helps determine the type of loan you can obtain.

Without knowing your score, a lender can only give you a loose idea of what you might receive. They may change their minds later if it turns out your score falls below a certain threshold.

These figures help the lender determine how much you of a loan you "qualify" to receive. Simply speaking, prequalification sparks a conversation between you and a bank that you may want to do business with.

Sometimes you could be prequalified in an instant. You fill out the information on a website. You don't even talk to a loan officer.

Certain large banks offer an automated answer, as you get when applying for a credit card. This should give you an idea of how loosely regarded the prequalification is.

Lenders use a prequalification as a lead generation system. This is why you may see online programs offering an instant answer.

They use the information they obtain to market their products to potential clients.

Taking the First Step

Talk to several lenders before you shop for a home. Because there is no commitment involved, you can shop around. This gives you a better idea of what's available.

Your mortgage is a very large investment. You borrow large amounts of money that you agree to pay back over the next 15 to 30 years. The prequalification process can help find a bank you trust.

You provide a lender with the following information:

  • Name
  • Address
  • Amount of gross monthly income
  • Amount of monthly debts (car loans, student loans, personal loans, credit cards)
  • General idea of your credit score (if you know it)
  • How much money you think you want to borrow
  • How soon you think you need the loan

The lender then uses this information find a loan amount you may be able to afford.

Tips For Obtaining Prequalification

If you have never owned a home before, the prequalification process is crucial to get familiar with the mortgage industry. It helps you understand:

  • Various terms
  • What you need to get a loan
  • Practices you need to change

Keep reading to learn some ways to make the most of this process.

Research Different Loan Programs

There are numerous loan programs available today. FHA, USDA, VA, and conventional loans are a few types you may hear about.

Take the time to familiarize yourself with these loan options. If this is your first time hearing these terms, read our article Different Types of Mortgages to learn more.

Research Different Lenders

Finding a lender takes a lot of work. The prequalification stage is the perfect time to handle this task. Because you aren't looking for a commitment, you can check out what different lenders offer.

When you apply with certain lenders, you may discover that you do not like how they do business. It's better to learn these things BEFORE you find a home.

TIP: Research lenders online before you start shopping. Look at their various offerings and read reviews to see what others have to say.

Prepare for Your Prequalification

Treating prequalification as if it were your mortgage to get the most accurate answers. Before talking to lenders, take a hard look at your financial life.

Start with your credit: You are eligible to receive a free credit report from the three credit bureaus annually. Request a copy from Equifax, TransUnion, and Experian.

Look over each report carefully to ensure accuracy. Figure out any "cleaning up" you have to do like:

  • Late payments
  • Collections
  • Overextended credit

Now is the time to fix these issues.

Talk to a loan officer in person: Make sure to bring your paperwork with you. It tells them what type of income you have, how much you make, and how much money you have saved up.

Even though it's not required, think of this as an opportunity for the lender to tell you what you need to fix.

Example: A lender may not accept recent large deposits in your checking account. They may recommend that you wait until the funds are in your account for at least six months before applying for a loan.

This process is called seasoning and means sitting in your account for a specific amount of time.

Tell the Truth

Inflating your income, minimizing your debts, or exaggerating your credit score will not help during the prequalification process. Once you provide documents for lender verification, the truth will come out.

The lender will then be unable to qualify you for the loan they estimated you could afford. And you won't be able to move forward on your home unless you can find another lender.

Next Steps

Once you secure the prequalification, you need to take things a step further with a preapproval.

To learn more about the preapproval process, read Mortgage Pre-Approval.

You now provide the lender with documents to back up the claims you made for the prequalification. These include:

  • Paystubs showing the last 30 days of income
  • Name, address, and phone number of your employer to verify your employment
  • W-2s covering the last two years of employment
  • Tax returns for the last two years if your income is anything but salary
  • Asset statements proving the money you have for a down payment

If you were honest about your income, debts, and credit score, the amount may mirror the prequalification. But certain things may make the amount different.

The lender may calculate your income differently than you do. This can happen in the case of hourly employees or those working on commission.

Other issues that pop up include debts you forgot about or a lower credit score than you thought you had.

Once you've got both your prequalification and preapproval, it's time to formally start the home-buying process. This guide from Selling Warner Robins lays out everything you need to know about getting tax deductions as a new homeowner.

Bottom Line

The prequalification process provides guidance regarding what steps you should take next. If you have things to fix, the lender can point you in the right direction.

A prequalification doesn't cost money and does not commit you to anything. At the very least, it keeps your home search within a reasonable budget.

It also lets you know where you stand. The home buying process is stressful. Anything you can do to make it less complicated is well worth it.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

More from CreditDonkey:


Pre Approval Mortgage


Buying Your First Home


Underwriting Process

More Articles in Money Tips

Mortgage

Historical Mortgage Rates

Mortgage rates have seen major highs and lows since Freddie Mac started tracking them in 1971. Rates have gotten as high as 18.63% and as low as 3.31% for a 30-year fixed rate loan. Mortgage rates today remain on the low end, with the average ...

Leave a comment about What Does Prequalify for a Mortgage Mean?

Name
Email (won't be published)


June
24
2019

Business Checking Account Promotions

View the list of the current top business checking deals and promotions. Earn cash bonuses for opening a new account.
More Articles in Money Tips







About CreditDonkey®
CreditDonkey is a mortgage comparison website. We publish data-driven analysis to help you save money & make savvy decisions.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed on this page are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

†Advertiser Disclosure: Many of the card offers that appear on this site are from companies from which CreditDonkey receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). CreditDonkey does not include all companies or all offers that may be available in the marketplace.

*See the card issuer's online application for details about terms and conditions. Reasonable efforts are made to maintain accurate information. However, all information is presented without warranty. When you click on the "Apply Now" button you can review the terms and conditions on the card issuer's website.

CreditDonkey does not know your individual circumstances and provides information for general educational purposes only. CreditDonkey is not a substitute for, and should not be used as, professional legal, credit or financial advice. You should consult your own professional advisors for such advice.