You’ve probably seen the ads and billboards: “Get prequalified for a mortgage now!” Mortgage prequalification can help you determine your homebuying budget by providing a rough estimate of your borrowing power. However, it is only an estimate and won’t be very useful if you want to make a firm offer on a home.
Here’s everything you need to know about mortgage prequalification, including what it is, how to get it, and how it differs from mortgage preapproval.
What is mortgage prequalification?
Mortgage prequalification indicates that a lender has estimated how much house you can afford based on basic financial information. It’s a preliminary assessment of your loan eligibility and the potential loan amount.
Keep in mind, prequalification is not a loan commitment or a guaranteed amount. It is not an official mortgage application, which happens after a seller accepts your offer on a home.
How to prequalify for a mortgage
Most prospective homebuyers seek mortgage prequalification online or by phone. To prequalify for a mortgage, you’ll need to provide the lender with information about:
- Your income
- Your employment
- Your monthly debts or obligations
- Your financial assets: savings, checking, retirement, and investment accounts
- Your Social Security number
- Your planned down payment
- Your history of bankruptcies
“Prequalification is an early step in obtaining financing,” says Will Reynolds, a real estate agent based in Nashville, Tennessee. “This is not a guarantee of a loan but a first, very important step in the process.”
The process is quick. The lender evaluates your information, often running a soft credit check. You should receive an answer within minutes.
Why get prequalified?
Getting prequalified offers several advantages. First, it helps establish a ballpark homebuying budget. Knowing how much you can finance gives you a clearer idea of what homes and neighborhoods are within your price range, preventing you from wasting time on properties you can’t afford.
A mortgage prequalification also provides insight into whether your credit or finances need improvement. This way, when you’re ready to apply for a loan, you might qualify for a larger amount or a better interest rate. Additionally, prequalification can expedite the loan process. While you’ll still need to apply and submit actual paperwork, you’ll have a good idea of what information the lender requires and can be prepared with the necessary figures and documents.
While most homebuyers can benefit from getting prequalified, it’s not always necessary. For instance, if you already have a clear understanding of your price range, have compared lenders, and have your finances in order, you can skip the prequalification step and proceed directly to getting preapproved.
Mortgage prequalification vs. preapproval
While they sound similar and are sometimes used interchangeably, prequalification is not the same as preapproval.
With a home loan prequalification, lenders rely on the information you provide about your finances without requiring documented proof. Prequalification gives you an idea of what you can afford, but it doesn’t guarantee you’ll receive a loan of that size or even a loan at all. In contrast, a preapproval is a more substantial commitment from the lender — an agreement in principle to extend you a certain amount of financing, often with an estimated interest rate.
Here are some key differences between preapprovals and prequalifications:
Mortgage prequalification
What you need to submit:
- Information on your income, desired loan amount, and down payment
- Typically includes a soft credit check
How long it takes:
- Usually only a few minutes
Why it matters:
- Helps estimate how much house you can afford
Mortgage preapproval
What you need to submit:
- Documents proving your income, debt, bank accounts, and tax returns
- The lender will conduct a hard credit check
How long it takes:
- Up to 10 days, though many online lenders offer preapprovals within minutes
Why it matters:
- Demonstrates that you’re a serious buyer with financing lined up
A preapproval carries more weight than a prequalification. Having a preapproval letter in hand before making an offer on a home provides proof to the seller that you can complete the purchase. Some sellers even require buyers to submit a preapproval letter with their offer.
In contrast, a prequalification is more suitable for the initial stages of house hunting. It helps you determine your price range. While you can get a letter confirming your prequalification status, it doesn’t carry much weight with sellers since it doesn’t guarantee financing.