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What Is Mortgage Prequalification?
Before you start visiting open houses and bookmarking your favorite homes for sale, you should find out how much house you can afford — and what a lender is willing to let you borrow. You can get this crucial information through a mortgage prequalification. Too many buyers find the perfect home and are later shocked when they find out they don’t qualify for a loan that covers the cost of the home.
In order to prequalify for a mortgage, you’ll need to round up your financial documents and provide your information to your mortgage broker or bank. The process isn’t difficult — but it’s an important step that should be taken before you start house hunting. You’ll have a better idea of how much you can afford to borrow and whether you’re even ready for the big step to save yourself from disappointment later in the process.
What is mortgage prequalification?
A mortgage prequalification is the first step in getting a home loan and gives you an estimate of how much money you can afford to borrow. It’s a green light from a lender to start looking at houses within a certain price range, although a loan isn’t guaranteed just yet.
You can start a mortgage prequalification with a mortgage broker, bank or lender in a few ways — either online, in-person or over the phone. You’ll need to provide information about your income and assets, debts and credit score.
It’s important to be as honest and complete as possible about the info you provide — lenders don’t typically do a hard pull of your credit or verify your documents during prequalification. They use the information you provide to get an overview of your financial situation. In turn, they’ll give you an idea of how much home loan you could qualify for and how much your monthly mortgage payments could be.
There’s a lower level of commitment at this stage, so it’s a good place to start if you want to explore how much house you can afford and whether you’re ready for the costs and responsibilities of owning a home.
Prequalification vs. preapproval
Prequalification gives you an idea of how much a bank is willing to lend you and how much you’re expected to pay for the loan. If you feel comfortable with the information on the estimate, your next step would be to ask the lender for a preapproval.
A preapproval takes more time but holds more weight than a prequalification. At this point, a lender will review the information you gave them and verify all the financial documents that back it up. They will also run your credit to fine-tune exactly how much you’ll be able to borrow. If you’re ready to get preapproved for a mortgage, some of the documents you’ll need to provide the lender include:
- The last two years of tax returns
- The last three months of bank statements
- W-2s or pay stubs
- Documentation regarding other assets or debts
Once you’re preapproved, the lender will issue an official letter showing the amount you’re preapproved for, along with the terms. If you’re house hunting in a competitive market, you may not get your foot in the door to see a property without a preapproval letter.
The letter can also show realtors and home sellers you’re a serious buyer, which could be helpful if you decide to make an offer on a house.
How long does a prequalification take?
A mortgage prequalification is fast when compared to a preapproval. The process is simple — you’ll be asked about your debts, income and what you believe your credit score is. Once you answer all the questions asked about your financial picture, a lender can make a pretty quick decision on how much they think you can borrow.
The lender will probably spend some time with you to help you understand:
- What your monthly mortgage payments may be based on the amount you’re prequalified for
- A breakdown of closing costs
- An estimate of what to expect as far as property taxes and insurance and how they could affect your monthly payments
- Scenarios of how a change in mortgage interest rates can affect your monthly payments
You may find that you qualify for a higher amount than you’re comfortable buying at. You don’t have to use the maximum amount you’re approved for. The lender can help you find a target home price based on a monthly payment you’re more comfortable with.
Take the time to ask questions, understand the home buying process and know what your financial responsibilities are during a mortgage prequalification. The home buying process is less stressful when you know what to expect.
How to get prequalified
If you’re ready to start the process of buying or looking for a home, you should prequalify for a mortgage. There’s no commitment in this phase — you won’t be submitting financials or having your credit checked yet.
To get prequalified, ask family and friends for mortgage lender recommendations — you may want to get prequalified directly from a lender or your existing bank. Another option is to contact a reputable licensed mortgage broker.
Mortgage brokers work with a variety of banks and shop their customers’ loans around to the best lender. A broker may be your best bet if you want to save time with comparing lenders, or if you have special conditions that make it harder to prequalify for a mortgage, such as being self-employed.
Once you’re ready, you can prequalify on most lender websites by entering your information. If you’re not familiar with the home loan process and would like to learn more, you may want to call or meet in person with a representative to get prequalified for a mortgage instead. That way, you can ask questions along the process.
Round up your documents ahead of time and have the following info ready for the mortgage prequalification process:
- Credit score estimate
- Annual income
- Amount of debt (overall and monthly installments)
- Amount of your last two years of income on your tax returns
- For freelancers or self-employed individuals, the adjusted gross income on the last two years of your tax returns
The lender will use the information to give you a ballpark estimate of how much you’re likely to qualify for and how much it will boil down to in monthly payments.