Getting a mortgage can be confusing and lengthy, especially if you’re a . As you learn more about it, you’ll probably hear about milestone steps like prequalification, preapproval, home appraisal, and closing.
We’ll share everything you need to know about mortgage prequalification. That way, you can shop for a home and with confidence.
What is mortgage prequalification?
Mortgage prequalification helps you determine . When you apply for prequalification with a mortgage lender and are approved, they will give you an estimated maximum loan amount so you know your home-buying price range. You may also receive a tentative interest rate.
Generally, mortgage prequalification happens after you decide to but before you start seriously looking at properties.
“It is a good way for you to determine if you’re in the right place financially to move forward with considering buying a home,” Stephanie Amedee, branch manager with Semper Home Loans, Inc., said via email.
Important note: Your prequalification amount doesn’t tell you how much you should spend on a house — it’s what you may be allowed to spend. You should review your finances carefully to see what monthly mortgage payment amount comfortably fits your budget.
How do you prequalify for a mortgage?
Mortgage prequalification is a fast and informal exercise. You tell the lender about your employment, income, and assets. Then the lender will typically run a soft inquiry on your credit (which doesn’t hurt your ) to assess your creditworthiness and see how much debt you have, said Amedee.
At this stage, the lender uses your self-reported information to determine your prequalification status and amount. You won’t need to provide supporting documentation like paystubs, W2s, tax returns, or bank statements.
Most lenders will do a mortgage prequalification online, over the phone, or in person, said Amedee. While every has a slightly different process, you can expect to get your results quickly — sometimes in minutes. It’s also typically free to apply for prequalification.
Some lenders might require you to apply for prequalification again if you haven’t moved forward in the mortgage process after a certain amount of time. With others, technically, your prequalification never expires. However, if your financial situation changes, the amount the company is willing to lend you may change along with it.
Prequalification vs. preapproval: What’s the difference?
The terms mortgage prequalification and are often used interchangeably because the process of obtaining them is similar. In both cases, you provide information to a lender, and the lender tells you how much the company may be willing to loan you.
However, preapproval is much more official than prequalification. When applying for mortgage preapproval, you must supply documentation supporting your claims about your financial situation. Plus, the lender will run a hard inquiry on your credit (which may cause your score to drop slightly), said Amedee.
Home sellers typically prefer a preapproval letter over a prequalification letter because if you’re preapproved, your lender is giving you a conditional approval (instead of just a potential loan estimate) to lend you a certain amount. This means you have a strong chance of getting a mortgage of that size as long as your finances remain stable.
Generally, prospective homeowners seek mortgage preapproval after getting prequalified, but you can skip the prequalification process if you want to start soon. However, a preapproval letter will expire within a few months (or less), so keep that in mind as you determine your home-buying timeline.
Important note: “You cannot be guaranteed a mortgage until you have been cleared to close by underwriting,” said Amedee. If you lose your job, fall behind on your bills, or experience a drop in credit score, your preapproval letter may not mean much.
Steps to take if you can’t get prequalified
If you’re denied prequalification for a mortgage, or if you’re prequalified for less than you expected, ask your lender why. Then you can address the issues and try again later.
For instance, if your credit score is too low, you should check your credit report for errors and contest any mistakes with your creditor or the credit bureaus. You could also pay off some debt to improve your or include a creditworthy cosigner on your application.
You might also be able to boost your prequalification amount by increasing your income, said Amedee. A bigger paycheck means more cash flow to cover your housing bill and other responsibilities.
Plus, you may still be able to work with a lower prequalification amount if you put in some creativity and effort. For example, you could purchase a less expensive home that needs cosmetic updates or save up for a larger down payment so you don’t need to borrow as much from the lender, said Amedee.
Both options can result in a smaller mortgage, reducing the lender’s risk. Plus, if you put down at least 20% on a conventional mortgage, you can avoid paying for , saving you a significant sum over time.