How to prequalify for a home loan as a first-time buyer

What does it mean to prequalify for a home loan?

As you prepare 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 ballpark estimate of how much house you can afford.

Prequalification is typically quick and easy — you don’t have to provide documents to the lender, only answer a few short questions.

By getting prequalified, you can be sure you’re shopping for homes within your true price range, and not getting your heart set on a home you won’t be able to afford.

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Why get prequalified for a home loan?

Prequalifying for a mortgage loan isn’t only useful for getting a ballpark estimate of affordability. It can be the first step of your home buying process and an opportunity to shop around and compare loan offers.

The purchase price of a home isn’t the only factor that determines your monthly mortgage payment. Your mortgage rate also plays a big role.

Your mortgage interest rate is the percentage of your principal loan balance you’ll pay your mortgage servicer in exchange for borrowing the money to purchase a new home. It influences how much you pay on a monthly basis and over the life of the loan.

Knowing your rate and prequalified loan amount is a crucial first step to house hunting because it ensures you’re looking at homes and making offers within your price range.

How to prequalify for a mortgage loan

If you’re a first-time homebuyer, getting prequalified might seem intimidating. But the process is relatively easy.

In most cases, you don’t have to meet a lender face-to-face. Many banks and mortgage companies have online prequalification forms that take only minutes to complete.

Steps to prequalify as a first-time home buyer:

1. Visit a lender’s website and complete the prequalification form. Select the link “apply online” or “get prequalified”
2. Next, provide the lender with basic financial information. This includes your total monthly income (prior to taxes), additional income sources, and monthly debt payments
3. Once you submit the online prequalification form, the lender may conduct a soft credit check. These credit checks don’t impact your credit score. This is how a lender pre-screens applicants to see if they meet the minimum qualifications for homeownership

If you meet lending requirements based on your credit profile and the information you provide, the lender will issue a prequalification showing your likely interest rate and the maximum loan amount you can borrow.

Note, a prequalification is not a commitment to loan you money on the lender’s part.

The rate and loan amount you’re offered aren’t binding until you’ve completed a full application and submitted all your financial documents. The lender’s underwriting process will verify your eligibility, rate, and loan size.

However, prequalification is a useful first step to determine your home buying budget and set you on the right track for house hunting.

Do I need to get prequalified?

You might ask, is a prequalification really necessary when buying a home? The short answer is no.

There’s no rule that says you must get prequalified before shopping for a home. However, prequalification has its benefits.

Getting prequalified gives you clues about potential eligibility for a mortgage loan, as well as an idea of your home buying budget. This is need-to-know information, especially if you’re questioning whether your income is enough to afford a home purchase.

For example, after a review of your prequalification form, a lender might say you prequalify for a mortgage up to $150,000.

If you believe you’re able to find a suitable property within this price range, you might proceed with the mortgage application process. But if not, you could postpone the mortgage and wait until your financial situation improves.

But although a prequalification is a helpful first step and provides information about budgets, it doesn’t carry as much weight as a preapproval.

“Even if it’s not a necessity, prequalification is always good to do ahead of rate shopping, especially if you don’t get preapproved,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “Getting prequalified will help you understand your limits.”

Prequalified vs. preapproved: What’s the difference?

Some people use the terms prequalify and preapproval interchangeably, yet these terms are not the same.

To be clear, neither a prequalification nor a preapproval guarantees a mortgage. Even so, when you’re ready to make an offer on a property, some home sellers only accept offers from preapproved buyers.

In a competitive housing market, a seller might choose a preapproved buyer over a prequalified buyer.

For both processes, you’ll provide personal and financial information to a loan officer. The difference, though, is that lenders base prequalifications on self-reported information. In other words, the lender doesn’t verify this information

The preapproval process, on the other hand, involves verification of stated income. Lenders will conduct a hard credit check, analyze your credit report, and review supporting documentation like your W-2s, tax returns, social security number, and bank account statements.

A preapproval is a stronger indication of mortgage approval, which builds your credibility as a serious buyer. For this reason, in a multiple-offer scenario, a seller might choose a preapproved buyer over a prequalified buyer.

When should I get prequalified?

Some people get prequalified when casually looking at homes, or when they want a general idea of their future budget.

Keep in mind that a prequalification isn’t always necessary. If you’re ready to purchase, you can skip this process altogether and apply for a mortgage preapproval instead.

When should you get preapproved?

The best time to get preapproved is a few weeks or months before purchasing. You shouldn’t get preapproved too early. In most cases, a preapproval letter has an expiration date — typically, about 30-60 business days, depending on your lender.

You should also get preapproved before meeting with a real estate agent and actively looking at homes. If you don’t know your budget, you could potentially make an offer on a home that you can’t afford.

Plus, a preapproval provides additional information to help you prepare for a purchase. You’ll not only receive information about loan terms and loan amounts, but also estimates regarding interest rates, down payment amounts, and monthly mortgage payments.

How to get preapproved for a home loan

To prepare for a preapproval, gather your documents early and submit these to a mortgage lender in a timely manner.

Borrowers typically need to submit the following documents along with their mortgage application:

• Tax returns and W-2s from the past two years
• Recent pay stubs
• Bank statements for savings accounts and other assets
• A copy of your driver’s license
• Employment verification
• Rental history
• Personal information like your address and Social Security number

Depending on your circumstances, you might also provide a gift letter, a year-to-date Profit and Loss statement (if you’re self-employed), as well as court-ordered information about alimony or child support, if using this income for qualifying purposes.

If you have alternative sources of income, issues in your credit history, or unusual deposits in your bank account, you should be prepared to explain these anomalies 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 loan.

These requirements will vary depending on your loan type. But you’ll typically need a minimum credit score of 620 for a conventional home loan and VA home loan; 580 for an FHA loan; and 640 for a USDA home loan.

Nowadays, most mortgage programs also require a minimum down payment.

Down payments 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 don’t require a down payment.

New homeowners are also responsible for closing costs, which typically cost another 2-5% of the loan amount. You will generally pay closing costs upfront, or you may be able to roll them into your mortgage loan.

In addition, most mortgage programs require at least 24 months of consecutive employment, and your debt-to-income ratio (DTI) must meet the minimum qualification for the loan program — typically no more than 36% to 43%.

Mortgage lenders will focus on many aspects of your personal finances, but both your credit score and DTI are key. You can improve both of these scores in the months leading up to your homeownership journey by paying down as much debt as possible — such as high-interest credit card debt, student loans, and any installment loans.

Check your mortgage eligibility

Before you can get serious about buying a home, you need to know whether you’ll qualify for financing and how much you can borrow.

Mortgage prequalification will help you look for homes in your price range. And, when the time comes, your preapproval letter will give you the power to make a competitive offer on your dream home.

If you’re ready to buy, don’t wait on getting preapproved. Make sure you’re eligible and check your loan options and interest rates. Experiment with a home affordability calculator or start the process online in just a few minutes.