Pros and cons of mortgage prequalification

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Buying a house can be a long process, but one way to speed the mortgage part of it is to get prequalified. A mortgage prequalification is one step short of a preapproval, but has its advantages. Here’s what prequalification is all about, and why you might want to get prequalified for a mortgage.

What is mortgage prequalification?

A mortgage prequalification is an estimate of how much a borrower can be approved for based on income and other basic factors. The prequalification process is simpler than the preapproval process, and can typically be done through a phone call or online form that provides some financial information to a lender.

Pros of mortgage prequalification

You’ll get an idea of your budget

One advantage of going through the prequalification process is that you’ll have a general idea of what you can afford before you shop for a home, says Mac Cregger, senior vice president and regional manager of Angel Oak Home Loans in Atlanta.

You’ll avoid sticker shock by going through this process early, especially if you’re buying your first home.

“Sometimes buyers may have an unrealistic perception of payments on a particular home due to the way some of the information on mortgage payments may appear online,” says Craig Garcia, president of Capital Partners Mortgage in Coral Springs, Florida. “Having a strong knowledge of what a realistic payment is on a home can help buyers focus in on properties that realistically match their budgetary desires or constraints.”

Potentially, you’ll also know where you stand with closing costs, says Abel Carrasco, loan originator with Homeowners Financial Group in St. Petersburg, Florida.

“Understanding how much money you’ll need to bring to closing, including the down payment and closing costs, will help you better manage your spending and help plot a course to help you achieve your goal of homeownership,” Carrasco says.

You could be in a stronger position

A prequalification can put you in a “better negotiating position with the seller,” points out Peter Boomer, a mortgage executive at PNC Bank — although these days, a preapproval holds much more weight.

Still, being prequalified can help let the seller know “you mean business,” Carrasco says.

“It’s not uncommon in this market for sellers and their Realtors to insist on seeing a prequalification letter prior to even letting you see the home,” Carrasco says. “In a hot market, sellers don’t care to waste their time preparing their home for a showing and leaving only to have a ‘tire kicker’ traipse through their house with no means or intentions of buying it.”

You can learn more about your options

Although prequalification is not a formal process like preapproval, it gives a borrower the opportunity to provide some information to a lender on income, assets and liabilities, Cregger says.

Now that the lender has this information, you can learn about the different types of mortgages that’d fit for your situation, and potentially any first-time homebuyer programs or assistance you qualify for.

“Perhaps you are able to purchase with less of a down payment than you assumed or perhaps your credit is in better shape than you thought,” Garcia says. “Understanding your options helps you make better decisions when it comes to selecting a home.”

Cons of mortgage prequalification

It can affect your credit score

If you get prequalified multiple times over a long period, such as once in January and again in June, your credit score will be impacted. This isn’t ideal, since you’re looking to apply for a loan with the most favorable rate and terms.

If you make mortgage prequalification inquiries over a shorter window, however, they’ll have little effect on your score. That’s because credit scoring models group inquiries within a shorter period, typically 30 days, into one inquiry on your credit report. That means you should do all your shopping around in a short amount of time, if you can.

“It’s your right as a consumer to be able to shop between lenders to make sure you’re getting competitive quotes,” Carrasco says.

Once a lender pulls your credit, that same report will be used for underwriting if you submit a full mortgage application — and the lender doesn’t have to pull it again, since the report is good for 120 days, Carrasco adds.

Nothing is guaranteed

The mortgage industry does not have a defined standard on what exactly constitutes a prequalification or preapproval, Garcia says.

Most mortgage lenders consider a prequalification as a preliminary overview of a borrower’s needs and qualifications, designed to give the borrower an understanding of what may be possible. In other words, prequalifying doesn’t mean you’re guaranteed to get a loan. In fact, if the prequalification process isn’t as involved as the preapproval or doesn’t go into sufficient detail about your financial situation, you can still get denied. In this way, prequalifying can give a false sense of security.

Next steps

If you’ve been prequalified and narrowed down your search for a home, it’s time to get preapproved.

In the preapproval process, the lender reviews your credit report and financial situation and approves you for a specific mortgage loan amount. This requires submitting more detailed information, including documentation about employment, car and student loans, total savings and other debt such as credit cards.

Learn more:

Written by
Ellen Chang
Contributing writer
Ellen Chang is a freelance journalist who is based in Houston. For Bankrate, Chang focuses her articles on mortgages, homebuying and real estate. Her byline has appeared in national business publications, including CBS News, Yahoo Finance and MSN Money.
Edited by
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Reviewed by
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