Buying a home is a process, and especially in a competitive housing market, it’s important to set yourself up for success. Getting a mortgage prequalification can be a key advantage.
What is a mortgage prequalification?
In the most basic terms, being prequalified for a mortgage means that a lender has collected some basic financial information about you, and sometimes completed a credit check, to estimate how much house you can afford.
“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.”
Applying for the actual mortgage will come later, after your offer on a property has been accepted. The prequalification, however, can help get the ball rolling.
“Sellers and the seller’s agent will know that you have the ability to purchase the house rather than just trusting in blind faith,” Reynolds says. “If there are multiple offers or [you’re] in a competitive market, this can be the difference between getting the home you want or losing out on it.”
Mortgage preapproval vs. prequalification
“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.”
A prequalification can help you determine what price range of homes you should be considering, and many times there is no cost or fee involved.
How to prequalify for a mortgage
While every 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 generally quick, too — typically 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 be sure to ask the mortgage lender you’re working with how they structure their 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.”
Remember, however, that when you’re comparing mortgage offers, any 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.
Prequalifying for a mortgage isn’t required, but it can help kickstart the financing process, and also be a more accurate estimate of how much home you can afford.
“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, you can then get preapproved, which demonstrates 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.