What does it mean to pre-qualify for a loan?
When you’re preparing to buy a home, you’ll likely come across the term “loan prequalification.” This is the first step in the mortgage process, where a lender provides a rough estimate of how much home you can afford.
Pre-qualification is usually quick and easy – you don’t have to provide any documents to the lender, just answer a few short questions.
By becoming pre-qualified, you can be sure you’re buying homes in your true price range and not focusing on a home you can’t afford.
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How to pre-qualify for a loan
Pre-qualifying for a mortgage is not only useful for getting a rough estimate of affordability. It is also an opportunity to shop around and compare loan offers.
The sale price of a home is not the only factor that determines your monthly payment. Your mortgage interest rate also plays an important role. This influences the amount you pay on a monthly basis and the duration of the loan.
If you’re a first-time home buyer, being prequalified can seem daunting. But the process is relatively simple.
And in most cases, you don’t have to meet a lender in person. Many banks and mortgage companies have online pre-qualification forms that only take a few minutes to complete.
Here’s how to get pre-qualified for a mortgage:
- Visit a lender’s website and complete the pre-qualification form. Select the “apply online” or “get prequalified” link
- Next, provide the lender with basic financial information. This includes your total monthly income (before taxes), your additional sources of income, and your monthly debt payments.
- Once you have submitted the online pre-qualification form, the lender will proceed with a soft credit check. These credit checks do not affect your credit score. This is how a lender screens applicants to see if they meet the minimum qualifications for a loan
If you meet the loan requirements based on your credit profile and the information you provide, the lender will issue a pre-qualification stating your likely interest rate and the maximum loan amount you can borrow.
Note, a pre-qualification is not a commitment to lend you money from the lender.
The loan rate and amount offered to you is not binding until you complete a complete application and submit all your financial documents. The lender’s underwriting process will verify your eligibility, rate and loan size.
However, pre-qualifying is a helpful first step in determining your home buying budget and getting you on the right track to finding a home.
Do I need to be pre-qualified?
You may be wondering if a pre-qualification is really necessary when buying a house? The short answer is no.
There is no rule that says you have to be pre-qualified before buying a home. However, pre-qualification has its advantages.
Pre-qualification gives you clues about potential mortgage eligibility, as well as an idea of your home-buying budget. This is essential information, especially if you are wondering if you have enough income to buy a house.
For example, after reviewing your pre-qualification form, a lender might say that you are pre-qualified for a mortgage up to $150,000.
If you think you can find a suitable property in this price range, you can proceed with the mortgage. Otherwise, you could postpone the mortgage and wait for your financial situation to improve.
But while a pre-qualification is a useful first step and provides information on budgets, it doesn’t carry as much weight as a pre-approval.
Pre-qualified vs. pre-approved: What’s the difference?
Some people use the terms pre-qualification and pre-approval interchangeably, but these terms are not the same.
To be clear, neither pre-qualification nor pre-approval guarantees a mortgage. Even so, when you are ready to make an offer on a property, some sellers alone accept offers from pre-approved buyers.
For both processes, you will complete a form and provide your financial information. The difference, however, is that lenders base pre-qualifications on self-reported information. In other words, the lender does not verify this information
In a competitive housing market, a seller may choose a pre-approved buyer over a pre-qualified buyer.
Pre-approvals, on the other hand, involve verification of reported income. Lenders will do a thorough credit check, analyze your credit report, and review supporting documents such as your W-2s, tax returns, and bank account statements.
A pre-approval is a stronger indication of mortgage approval, which boosts your credibility as a buyer. For this reason, in a multiple offer scenario, a seller may choose a pre-approved buyer rather than a pre-qualified buyer.
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When should I be prequalified?
Some people get pre-qualified when looking at homes casually or when they want to get a general idea of their future budget.
Keep in mind that pre-qualification is not always necessary. If you’re ready to buy, you can skip this process altogether and apply for a mortgage pre-approval instead.
When should you get pre-approved?
The best time to get pre-approved is a few weeks or months before purchase. You shouldn’t be pre-approved too soon. In most cases, a pre-approval will expire after approximately 90 days.
You should also get pre-approved before meeting with a real estate agent and actively looking for homes. If you don’t know your budget, you could potentially bid on a house you can’t afford.
Additionally, a pre-approval provides additional information to help you prepare for a purchase. You will not only receive information on loan amounts, but also estimates for interest rates, down payment amounts and monthly mortgage payments.
To prepare for pre-approval, gather your documents early and submit them to a mortgage lender in a timely manner.
Borrowers generally need to submit the following documents with their mortgage application:
- Tax returns and W–2 for the last two years
- Recent payslips
- Bank statements for savings accounts and other assets
- A copy of your driving license
- Employment Verification
- Rental history
Depending on your situation, you may also provide a donation letter, a year-to-date profit and loss statement (if you are self-employed), and court-ordered child support information. or child support, if you use that income. for qualifying purposes.
If you have other sources of income, problems with your credit history, or unusual deposits in your bank account, you should be prepared to explain these abnormalities to your loan officer.
What are the minimum requirements for loan approval?
Before you apply, it’s also helpful to understand the minimum requirements for getting a mortgage.
These requirements vary depending on your type of loan. But you will generally need a minimum credit score of 620 for a conventional home loan and a VA home loan; 580 for an FHA home loan; and 640 for a USDA home loan.
These days, most mortgage programs also require a minimum down payment.
These can range from 3% to 5% for a conventional loan and start at 3.5% for an FHA home loan. VA and USDA home loans do not require a down payment.
New homeowners are also responsible for closing costs, which typically cost an additional 2-5% of the loan amount.
Additionally, most mortgage loan programs require at least 24 consecutive months of employment, and your debt-to-equity ratio must meet the minimum qualification for the loan program – typically no more than 36% to 43%.
Check your mortgage eligibility
Before you get serious about buying a home, you need to know if you will qualify for financing and how much you can borrow.
Mortgage prequalification will help you search for homes in your price range. And, when the time comes, your pre-approval letter will empower you to make a competitive offer on your dream home.
If you’re ready to buy, don’t wait to be pre-approved. Make sure you qualify and check your loan options and interest rates. You can start the process online in just a few minutes.
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The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.