Mortgage Prequalification: What it Means and How to Prequalify

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A mortgage prequalification is a nonbinding commitment that will detail how much a lender is willing to finance and at what interest rate. This helps you know how much home you can afford and could also put you ahead of the game with real estate agents and sellers by showing them you have the funds needed to close the deal. We cover the basics of how a mortgage prequalification works and how you can get the process started.

How does mortgage prequalification work?

After you submit basic financial information about your income, debt, credit and assets, a lender will review them and issue a written estimate of how large a mortgage they would be willing to approve and at what interest rate.

Prequalifications do not commit a company to lending you money. A lender has no obligation to fulfill the estimated loan amount or interest terms offered. In turn, the borrower is not bound to accept the estimate given or to work with that particular lender. In fact, it’s good to request prequalification from several lenders to shop around.

But having a general idea of the amount for which they qualify can help homebuyers narrow down their options by focusing on properties in a designated price range.

What's the difference between a preapproval and prequalification?

Prequalification and preapproval are similar terms that are often used interchangeably, depending on the lender. However, they are technically different.

Prequalification involves a basic check of your financial situation. A preapproval requires a more in-depth financial verification. In more competitive markets where houses are off the market in days, you might want to start with a preapproval instead.

Preapproval usually involves completion of a loan application, an authorized credit check and submission of documents solidifying income, debt, credit and assets. You’ll need to submit pay stubs, tax statements and banking statements. Depending on the nature of the loan or your financial situation, more could be required. Your lender will also pull your credit reports to verify a credit history and current credit score.

Both prequalification and preapproval are assets to potential buyers. They start the borrowing process and help secure the home seller’s confidence that the deal will close. In a more competitive housing market, having a preapproval can help a buyer gain an extra edge, especially if multiple offers have been made on a home.

“A seller doesn’t want to accept an offer, which can sometimes take their home off the market for 30 to 60 days, only to find out that the buyer does not have the ability to buy the home,” explains Joanna McCord, a senior loan officer at Union Savings Bank . “Getting prequalified gives the seller some security.”

Does prequalification guarantee a loan?

Don’t assume your prequalification means you’re guaranteed a loan for your desired home. The mortgage loan process can take between 30-45 days, on average, and plenty can change during that period, McCord said.

“A lot takes place behind the scenes during this time,” McCord said.

The home you’re buying will need to be appraised, and most lenders will take a closer look at your finances. Only after an underwriter reviews the complete file do they issue a commitment to lend.

During this time, expect to submit more documents and provide more details as underwriters will work to be sure all financial information can be verified.

How to get prequalified for a mortgage

To get prequalified, you'll need to get a pre-qualification letter from the lender stating the amount of financing you may be eligible for. You can accomplish this by asking a reputable mortgage lender that you trust for a mortgage pre-qualification.

During this process, it's a good idea to research lenders — banks, credit unions, online lenders — and then start submitting applications. You can do this on the web, or you can talk to a lender by phone or in person to start the process. You’ll need to provide your current income, employment information and list of debts.

Don’t limit your search to one lender, and feel free to shop around for the best deal. Each lender should then deliver an estimate of how much it’s willing to finance, and issue a prequalification letter with the estimated loan amount and interest rate. You can show this to real estate agents to present to sellers during the process.

How long does the prequalification process usually take?

If your finances are straightforward and your credit score is competitive (typically 700+), you can typically prequalify on the same day. If your credit history is complex, your credit score is low, or if you've had previous issues paying back your debt, pre-qualification may take days, or in some rare cases, weeks, if your request isn't rejected.

Does prequalification affect your credit score?

“A hard pull does have an impact on your credit score but usually only to the tune of about 5 points,” McCord said.

Lenders can do a “hard pull” of your credit as part of the prequalification process, meaning that the inquiry will be noted on your score. Inquiries indicate that you’re looking for credit, which can be considered a negative, but the impact shouldn’t really hurt your overall score.

This shouldn’t deter borrowers from contacting as many reputable lenders as possible, however. Credit agencies consider all inquiries made during a 45-day loan shopping period as one for scoring purposes, meaning that any additional credit pulls will not be subject to the five-point drop.

Some prequalifications don’t require a credit pull at all, and a lender can input the score you give them to render a mortgage estimate.

What happens after you're prequalified?

If you decide to move forward with the loan and the seller accepts your offer, the lender will begin the closing process. There will need to verify additional items before closing, McCord said, such as making sure the borrower is actually employed and reviewing their credit history.

Lenders strongly advise borrowers not to make any significant financial changes during this time. Don’t open new lines of credit or close old ones. Wait until after closing before changing jobs or putting a down payment on a new car. Any major financial actions could become red flags and jeopardize your closing.

If you’ve gotten this far, you should be in good shape. It's a good idea to monitor the lender's review process while being as responsive as possible to make sure everything is completed on a timely basis. With luck, you'll soon become the owner of a new house.

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