Mortgage prequalification: What is it, and do I need one?

Should I get prequalified for a mortgage?

It’s a good idea to get prequalified early in the home buying process. If you’re just starting to think about buying or house hunting, prequalification is a simple process that will tell you how much you can afford and help you set a price range.

Prequalification doesn’t guarantee your mortgage approval. But it’s a useful tool when you’re just starting out as a home buyer. And, since the process is pared–down, you can usually get prequalified easily and quickly online.

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What is mortgage prequalification?

Prequalification is an initial step in the home buying process that helps you understand your budget and mortgage options. To get prequalified, you generally connect with a lender, answer a few questions about your finances, and receive an estimate of the interest rate and loan amount you’re likely to qualify for. This gives you a realistic budget for house hunting.

Prequalification is different from preapproval because you don’t have to provide any documents or go through a credit check. Compared to preapproval, mortgage prequalification is a simpler and quicker process – but it’s only an estimate of your budget rather than a true approval.

How do I prequalify for a mortgage?

The mortgage prequalification process is relatively simple and quick. Online pre–qualification forms will ask questions related to your income, the amount of your down payment, and your existing debts.

The lender may also conduct a soft credit inquiry to see information about your credit history and credit score. A soft inquiry doesn’t affect your rating.

Based on the information you provide and the results of this inquiry, the bank determines the amount you might be able to borrow.

Prequalifications are quick, so it’s not unusual to receive a response within minutes. The lender will most likely issue a prequalification letter. This letter includes your estimated loan amount and sometimes a projected interest rate.

Keep in mind, the loan amount and rate you’re quoted are not guaranteed until you provide full documentation and go through the lender’s underwriting process. Your prequalified mortgage amount is only an estimate.

Additionally, these letters don’t carry as much weight as a mortgage preapproval letter. Once you have a specific property you want, you’ll have to get preapproved to verify you can afford it before making an offer.

Mortgage prequalification vs. preapproval

The terms ‘preapproval’ and ‘prequalification’ are sometimes used interchangeably, but they’re not the same.

There are two main differences between mortgage prequalification and preapproval:

1. Prequalification is an estimate based on your stated financials, whereas preapproval requires you to submit financial documents
2. Prequalification generally doesn’t involve credit check and won’t impact your credit score, whereas preapproval requires a hard credit inquiry and you score will take a small hit

Steps to get preapproved vs. prequalified

A mortgage preapproval takes a more in–depth look at your finances than when you get prequalified. The lender will collect supporting documentation before issuing an approval.

You’ll provide your lender with the following documents:

• Paycheck stubs for the last 30 days
• W–2s or 1099s for the past two years
• Tax returns from the previous two years
• Info on any other sources of income
• Bank account statements from the past 60 to 90 days
• Rental history
• Photo ID

The lender must verify that your income is consistent and stable and that you have enough cash saved for your down payment and closing costs.

A mortgage preapproval also involves a closer look at your credit reports. The lender not only considers your credit score but also your recent credit history. They’ll look specifically at your payment history and your current debts.

Preapproval lets you make an offer

Because a mortgage preapproval involves a deeper review of your finances, a preapproval letter carries more weight than a prequalification letter. In fact, you generally need a preapproval before you can even make an offer on a house. A prequalification letter won’t work at this stage because your finances need to be verified.

With a preapproval, you’re likely to get approved for the final loan – as long as all your information can be verified and nothing changes prior to closing.

When to get pre–qualified for a mortgage

A prequalification can make sense when you’re in the early stages of preparing to buy a home.

This information is valuable for planning purposes. You’ll have an idea of how much to save for your down payment and closing costs, and you’ll know what to expect with regard to a mortgage payment.

And if you’re denied a prequalification, you can take steps to improve your financial situation before buying. This might include paying your bills on time, saving more cash, paying down debt, and fixing errors on your credit report.

When to get pre–approved for a mortgage

If you’re looking seriously at homes and ready to start making offers, it’s time to get preapproved. The preapproval process will verify you can afford the home, and your preapproval letter shows the seller and seller’s agent you’re qualified to make an offer.

If you need to move quickly, be sure to have all your financial documentation on hand when you apply for preapproval. The quicker you can provide supporting documents to your lender, the faster your preapproval will move (and the sooner you can make an offer).

Once you’re pre–approved you’ll receive your verified loan amount, projected interest rate, and other details about the mortgage loan.

Mortgage prequalification FAQ