If you’re even thinking about buying a house sometime soon, getting prequalified is a great first step to take. Quick and easy to do, getting prequalified can often be done in minutes and is typically a free service offered by lenders.
Becoming prequalified for a home loan will not only help you build your credibility as a serious buyer but will also enable you to start understanding just how much house you can afford. By having this number in mind, both you and your real estate agent will be better able to focus your house-hunt on only those neighborhoods and homes that fall within budget.
Ready to learn more about getting prequalified and how it can help you find the home of your dreams? Keep reading.
Getting prequalified: What it means
A lot of people go into the house-hunting process with little to no understanding of the type of home they can afford. Many have neighborhoods in mind or even a number of desired bedrooms. It’s all too easy to get caught up in the excitement of buying a new home, without actually considering any of the harsher financial details — like monthly mortgage payments or even the possibility of expensive HOA fees
This is why getting prequalified is so important. By working with a local bank or lender to determine what your loan will roughly look like, you’ll have a much better understanding of your borrowing potential. Getting prequalified essentially gives you a financial snapshot of what your budget should be when shopping for a home, and allows you to start seriously planning for the type of house you’d like to buy. Rather than wasting any time or effort looking at homes outside your budget (or even the ones very far below your price range), you’ll know exactly where you stand and which homes you can reasonably afford.
Although the terms prequalified and preapproved
are often used interchangeably, they actually mean slightly different things. Getting prequalified can be thought of as a first step, in which banks give you a rough estimate of how much of a mortgage loan
you qualify for. This number is not set in stone, and in fact, may change (depending on how your financial situation changes) between the time you become prequalified and are ready to buy a home.
On the other hand, getting preapproved or getting a mortgage preapproval letter is usually something that happens later on, once you’re ready to buy a home
. Although the process for getting prequalified and preapproved is similar, getting pre-approved is usually more involved, and is seen as more of a sure thing — since it generally consists of a signed letter from a bank or lender saying you’re pre-approved for a loan up to a certain amount until a certain date.
Another thing to keep in mind about pre-approvals (also sometimes called prequalification letters) vs. actual prequalifications is that getting preapproved often requires more documentation, as well as a credit report. To get you pre-approved for a loan, your lender will likely conduct a hard inquiry credit check
(which may temporarily lower your credit score) to ensure you qualify for the full amount of financing you’re requesting. Getting a pre-approval letter can be hugely helpful when you’re more serious about buying a home while getting prequalified is a great place to start if you’re just looking.
How to get prequalified
Unlike completing a formal mortgage application to be sent to an underwriting team, or even getting a pre-approval letter written by a bank (which often comes later in the home buying process), the process for getting prequalified
is usually fairly quick and straightforward, and often free as well. To get prequalified as a borrower with a bank or lender, you’ll need to supply them with some basic financial information including your pay stubs, most recent tax returns, and any other proof of assets (which might include things like documentation for investment accounts or bank statements). Your loan officer might even ask you for your credit history, including any existing loans you currently have such as a car or student loans. You’ll also need to decide on a loan amount you’d like to borrow. That’s why it’s a good idea to crunch some numbers and come up with a tentative budget to determine how much house you can afford before approaching a lender.
Once your lender has this information in hand, they’ll be able to work with you and come up with a prequalification home loan amount that makes sense. While prequalifications aren’t a guarantee that you’ll be able to borrow a loan for that amount down the road (especially if your finances change significantly), they do provide a fairly accurate snapshot that can be used by you and your Realtor to set an accurate budget and focus on finding homes within that budget.
One final thing to keep in mind about prequalifications is that you’re not required to work with a lender just because they give you one. In today’s competitive market, you should always spend some time shopping around different mortgage options and mortgage rates to be sure and find the best loan program (with competitive interest rates) that works for you.
Why you want to get prequalified
Once you have your prequalification in hand, you’ll also be able to start calculating all the other expenses that come with buying a home, like your down payment
, monthly mortgage payments, and even other closing costs
and fees associated with home buying.
In addition to serving as a helpful benchmark for you, pre-qualifications also help everyone involved in the process— including your real estate agent, and even the people selling the homes you’re interested in. Since some real estate agents won’t even want to start showing homes without clients having a prequalification (or in some cases an actual form pre-approval letter), it’s a good thing to get done early on in your home search process. Pre-qualifications also lend credibility to your case as a buyer. By showing you’ve been prequalified for a loan up to a certain amount, you'll be taken more seriously as a buyer who can afford the house you’re interested in.
The bottom line
Whether you’re on the market to buy a home or just starting to shop around various neighborhoods, it’s never too early to get yourself prequalified
. By having a clearer picture of how much house you can afford, you’ll be on the right track to narrowing down your home search to those houses within budget, and you’ll also be that much closer to finding and securing your dream home.
Looking for help with an existing mortgage? Here’s everything you need to know to successfully refinance your current mortgage.