Getting prequalified is typically an easy and straightforward process, and it gives you a lot of knowledge to leverage in your search for a home. Prequalification can make a huge difference in the speed and success of your homebuying journey.
Mortgage prequalification is an important initial step for first-time homebuyers. Prequalification demonstrates that you meet a lender’s minimum requirements to take out a mortgage, which allows you— along with sellers and real estate agents— to assess your financial standing and home buying readiness. It’s an easy process, but one that homebuyers often overlook.
Don’t make the same mistake! Here are some of the basics you should know about mortgage prequalification, including what it is, how it works, and how it benefits you as a homebuyer.
Prequalification is provided by lenders to individuals or couples interested in securing home financing. You’ll provide some basic financial information and the financial institution will determine whether or not you meet their most basic loan qualifications.
Prequalification shows two things. First, it demonstrates that a lender has looked over your financial record and believes that you are likely to be approved for a mortgage when you actually apply. Secondly, it provides a ballpark estimate of how much a lender will loan you.
Keep in mind that this does not mean that you have been fully vetted for a specific mortgage. It is simply an indicator to real estate agents and sellers that you have the potential to successfully secure a mortgage. Prequalification does not include underwriting or final approval, so the lender is not guaranteeing any amount.
Getting prequalified is easy. It all starts by talking with a local lender. They’ll give you more information about their specific prequalification process and available mortgage loan types.
The exact steps may vary from lender to lender, but the concept is always the same: the financial institution will collect information about your monthly income, credit score and history, debt, and assets. This allows them to get a preliminary picture of your buying potential.
Financial information for prequalification is self-reported, meaning that the lender probably won’t do any digging to verify what you provide. It also means that you don’t need to worry about providing documentation like tax returns or pay stubs just yet.
It’s important to be truthful and as accurate as possible. Getting prequalified based on false information will only cause you frustration down the line—you might not qualify for a better interest rate, or even worse, you could be denied a mortgage altogether.
The prequalification process only takes a day or two and can be done in person, on the phone, or online, depending on the lender. If you are prequalified, you will receive a prequalification letter via mail or email. This is the document that you can share with real estate agents, a seller’s agent, or when putting in an offer on a house.
Getting prequalified is beneficial for several reasons.
First, it demonstrates to sellers and real estate agents that you are serious about buying. You’ve taken the time to speak to a lender, which shows that you are less likely to waste anyone’s time. In fact, some real estate agents will only work with buyers who have been prequalified.
Many home sellers have deals fall through because the buyer can’t obtain financing. By getting prequalified, you boost their confidence that the sale will go through without issue. In a hot seller’s market, letting sellers know about your borrowing power is particularly advantageous.
Secondly, prequalification helps narrow your search by providing an estimate of how much home you can afford. In a booming housing market, being able to eliminate houses outside of your budget can lessen stress and help you find a home that you can realistically afford sooner.
Here are some answers to common questions first-time homebuyers have about mortgage prequalification.
The best time to get prequalified is before you start house hunting. It can help set your budget, while also providing proof to agents that you’re able to purchase a home.
You may have also heard the term “pre-approval” used when talking about home financing. Prequalification and preapproval are not interchangeable terms and are two different processes.
Though they have some similarities, mortgage pre-approval is a more in-depth process during which a lender will verify the information that you provide, pull credit reports, and more.
No, prequalification is not a guarantee that you will be approved for a specific mortgage amount. Getting pre-qualified is a great first step toward homebuying; it shows that you are a good candidate for a mortgage and that you aren't wasting the time of a real estate agent or home seller. But it doesn't mean that your financing is approved or guaranteed.
When you are ready to move forward with a purchase, you will go through a more extensive mortgage application process. With factors like your income and expenses, your other debt amounts, your employment, and rising and falling mortgage interest rates, a lot of financial institutions prefer to review mortgage applications closer to closing.
Loan interest rates, closing costs, and other factors can vary from lender to lender. Because of this, it’s important to compare offers from several institutions. Getting prequalified is a great opportunity to see what kinds of loan products a lender offers, what their rates may be, and what their customer service is like.
Keep in mind: it’s not all about getting the lowest interest rate. It’s important to look over every detail of the transaction, including added fees, who will service your loan in the future, whether they’re going to sell the mortgage and to whom, and how easy refinancing might be in a few years. Don’t be deceived by promises of low rates and an easy process—look at the fine print for potential downsides and higher fees that they may be tacking on.
No. Since prequalification is more informal, a lender won’t perform any hard inquiries on your credit report and your score will remain unaffected.
If a financial institution does not extend prequalification to you, it likely means that you have failed to meet the minimum requirements for a home mortgage. Though this can be discouraging, it is far better to learn this before you spend time house hunting.
A denied prequalification does not mean that you will never be able to buy a house. It simply means that one or more aspects of your current financial situation need to be improved. Contact the lender to discuss the issue and learn how you can fix it.
Getting prequalified for a mortgage is a great first step to take on your home buying journey. It’s quick, easy to do, and will help you assess your financial readiness and budget. Once you start meeting with agents and sellers, having a prequalification letter in your pocket will make you a more attractive potential buyer and help you land an offer on a home.
When you choose Amplify for your home loan, we’ll go over your loan options, making sure you have the information you need to make a healthy financial decision. Contact our real estate team or apply for your first mortgage today.