What is a mortgage prequalification?
A mortgage prequalification signifies that a mortgage lender has collected some basic financial information about you, and sometimes completed a credit check, to estimate how much house you can afford.
To prequalify for a mortgage, you’ll need to provide the lender with some information about your finances, including your income and any debt you have and basic details about your bank accounts. You’ll likely need to let the lender know how much you’re hoping to borrow, as well, along with how much you plan to contribute toward a down payment. If you’ve been through a bankruptcy or foreclosure, expect to be asked about that, too — depending on the type of loan, you might need to wait for some time to pass before being eligible to qualify for a mortgage.
It’s a fairly quick process, with information you’ll likely know off the top of your head.
“Prequalification is an early step in obtaining financing,” explains Will Reynolds, a real estate agent based in Nashville, Tennessee. “This is not a guarantee of a loan, but simply a first, but very important step, in the process.”
Mortgage preapproval vs. prequalification
|Mortgage prequalification||Mortgage preapproval|
|What you need to submit||Basic financial information about how much you earn, how much you want to borrow and how much you want to put down; in some cases, a credit check is required||A full under-the-hood look at your income, debt, bank accounts, tax filings and credit|
|How long it takes||Very fast — a few minutes||Longer with most lenders — in some cases, 10 days, although many online lenders offer preapprovals within a couple of minutes|
|Why it matters||You’ll have a good idea of what you can afford||You’ll have evidence that you’re a serious buyer with financing lined up|
A mortgage prequalification is not the same as a mortgage preapproval. While these two terms sound similar, a preapproval generally carries greater weight and more detail about the loan you’ll be approved for — and in today’s market, you’ll need a preapproval letter in hand before you even consider making an offer on a home.
A prequalification, on the other hand, can help you determine what price range of homes you should be considering, and many times there is no cost or fee involved. When you really want to buy a home, the preapproval letter provides more concrete proof that you can make the deal happen. From the seller’s perspective, they’re looking for a preapproval, not a prequalification.
Getting preapproved tends to take more time than getting prequalified, too, because the lender reviews much more documentation. A lender will examine your debt, your tax returns and a range of other indicators that help them assess your ability to repay the loan.
“Unlike prequalification, preapproval is a more specific estimate of what you could borrow from your lender and requires documents such as your W2s, recent pay stubs, bank statements and tax returns,” Reynolds says. “The lender will then use these documents to determine exactly how much you can be preapproved to borrow.”
How to prequalify for a mortgage
While every mortgage lender is different, most prospective homebuyers seek a mortgage prequalification online or by phone. Most, if not all, of the information needed will be things you’ll know without much research, including how much money you make, where you work and your Social Security number.
The process is quick, too. Input everything, and you should have your answer within a matter of minutes.
Does getting prequalified affect your credit score?
When you’re thinking about purchasing a home, it’s vital to protect your credit score, so ask the mortgage lender you’re working with how they structure their mortgage prequalification process and whether it will include a credit check.
“Be sure to ask your lender exactly how he or she defines ‘preapproval’ or ‘prequalification’ and if it requires a credit check,” recommends Sarah Pierce, head of sales and operations for online lender Better.com. “‘Soft’ inquiries, or those that don’t come with a loan or credit offer attached, don’t affect your credit score at all. ‘Hard’ credit inquiries usually follow a request for credit, which can definitely affect your credit score.”
When you’re comparing mortgage offers, credit checks are usually counted as one inquiry on your credit report, provided you apply for prequalification (or preapproval, if the prequalification didn’t pull your report) within a short time frame, generally 30 to 45 days. So, if you’re shopping around for rate quotes from multiple lenders — which you should definitely do — it should have a limited impact on your credit.
While a mortgage prequalification doesn’t guarantee you will get approved for a home loan, it can provide helpful benefits. With home prices climbing, a mortgage prequalification can help you get a better sense of how much you’ll actually be able to afford. Once you have an idea of a lender’s estimate, you can cater your real estate search to certain neighborhoods or types of properties that will fit that budget.
“The last thing you want is to fall in love with a house that ends up being out of your budget, or, even worse, to seal the deal on a house you can’t comfortably afford,” says Pierce.
Once you’ve been prequalified and are actively looking for a home, it’s wise to then get preapproved. This will demonstrate to sellers that you have a commitment from a lender to provide you with a loan.
“It gives you an edge over other homebuyers who don’t yet have the proof that they’re financially ready to purchase,” says Pierce.
While mortgage prequalification and mortgage preapproval are two different signals, they share one commonality: Neither of them indicate that you actually have a mortgage. Check out this guide to how long it takes to buy a house for a clear picture of the path to becoming a homeowner.