Buying a house can be a long process, but one way to speed the mortgage part of it is to get prequalified. Potential homeowners who are prequalified for a mortgage will have an advantage because they’ll have a rough idea of what they can afford right from the start.
A 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.
Pros of mortgage prequalification
Potential homeowners can choose to see if they are prequalified. The process is simpler than being preapproved and can be done with just a phone call or online application by providing your basic financial information. Prequalification is only an estimate of how much a consumer can borrow based on his or her income and budget and can be a helpful process, especially for first-time homebuyers.
Mortgage prequalification is not a formal process like preapproval, but gives consumers the opportunity to provide your income, assets and liabilities to a potential lender, says Mac Cregger, senior vice president and regional manager of Angel Oak Home Loans in Atlanta.
One advantage of going through the prequalification process is that homebuyers will have a general idea of what they can afford before they shop for a home, he says. This can also help when the buyer makes an offer on a home they want.
Consumers can avoid sticker shock by going through this process, especially if they are buying their first home. The costs of owning a home can add up quickly and include more than the monthly mortgage payment.
“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.
Homeowners should also budget to pay for home insurance, property taxes, homeowners association fees and lawn maintenance.
“Having a strong knowledge of what the realistic payment is on a home can help buyers focus in on properties that realistically match their budgetary desires or constraints,” he says.
A prequalification can put the homeowner in a “better negotiating position with the seller,” says Peter Boomer, a mortgage executive at PNC Bank. The seller may have less worry about the deal falling through because a mortgage was not approved.
If you’re looking to buy a house in a hot market or popular neighborhood, being prequalified will let the seller know you that “you mean business,” says Abel Carrasco, a loan originator with Motto Mortgage Advisors in St. Petersburg, Florida.
“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,” he 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.”
After running the numbers with a mortgage professional, homebuyers will know where they stand financially, Carrasco says.
“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 helps plot a course to help you achieve your goal of homeownership,” he says.
During the prequalification process consumers can also learn about programs to assist first-time homebuyers with their down payment or learn about different types of mortgages offered by the Federal Housing Administration (FHA) or through the Veterans Administration (VA).
“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
If you get prequalified multiple times, such as in January and again in June, your credit score will be impacted.
But mortgage inquiries over a short period of time will have little effect on your credit score. Even if you’re shopping around and getting quotes from several lenders to find the best interest rate, if you conduct them within the same time period, your score will not be affected.
Once a lender pulls your credit, that same report will be used for underwriting and they do not have to pull it again since the report is good for 120 days, Carrasco says.
“It’s your right as a consumer to be able to shop between lenders to make sure you’re getting competitive quotes,” he says.
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 consumer’s needs and qualifications to give a borrower an understanding of what may be possible for them.
A pre-qualification may give people a false sense of security, however, if it did not include a thorough review of credit, income and asset documentation, he says.
Next steps for prospective homebuyers
Homebuyers who have been prequalified and have narrowed down their search for a home should consider getting preapproved. This process means a consumer’s credit has been reviewed by a lender and approved for a specific mortgage loan amount.
This process requires submitting a lengthier loan application and providing documentation about employment, car and student loans, total savings and other debt such as credit cards.
Either being prequalified or preapproved helps homeowners navigate and speed the process and set limits on how much house you can afford.
Both can help you reach the next step of shopping around for the best interest rates and terms.
“Purchasing a home is a huge financial responsibility,” Carrasco says. “It is imperative to begin the pre-qualification process at least a few months in advance of your anticipated purchase timeline.”