What Does Prequalify for a Mortgage Mean?
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.
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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.
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
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.
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.
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.
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.
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.
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.
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